The failure to get a revamped computer program online to screen for fraudulent 2006 tax returns will cost the federal government between $200 million and $300 million, the Internal Revenue Service has estimated.

Contractor Computer Sciences Corp. had promised to deliver a new version of the screener program, which has searched for signs of fraud in every return claiming a refund since 1996. When the firm was unable to produce a working program by the January deadline, the IRS couldn't restore the old program in time for April 15.

The agency said that it has stopped just 34 percent of the fraudulent refund claims that it had caught by this time last year. IRS Commissioner Mark Everson has said that he is reviewing options with the contractor and has punished or fired agency employees responsible. The contractor has already been told to stop work on the new Web-based program, which carries a $21 million price tag, and restore the old system before next year's returns begin to be filed.

The ranking members of on the Senate Finance Committee, Charles Grassley, R-Iowa, and Max Baucus, D-Mont., heavily questioned Eric Solomon, the president's nominee for assistant Treasury secretary for tax policy, about the problems with the redesign of the IRS's electronic fraud detection system last week. An investigative report on the matter is due for completion soon by the Treasury Inspector General for Tax Administration.

Grassley accused the IRS of failing to appreciate the risks of the new system or properly fund the project from the outset -- resulting in a lack of technical oversight and allowing for inaccurate reporting by the contractor throughout the entire process.

The Finance Committee learned of the problems with the fraud detection system while investigating a complaint from the National Taxpayer Advocate that the IRS was freezing taxpayer refunds owed to lower-income Americans without proper notification.

Previously on WebCPA:

Solomon: Tax Reform, Tax Compliance on Radar (July 14, 2006)Taxpayer Advocate Releases '05 Report (Jan. 11, 2006)

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