The Internal Revenue Service paid out $16.3 million in false refunds and 2,071 false stimulus payments totaling $1.2 million last year.

A report by the Treasury Department’s Inspector General for Tax Administration reviewed the effectiveness of the IRS’s efforts to prevent the issuance of fraudulent economic stimulus payments that claimed false tax refunds. The total fraudulent stimulus payments were a relatively small portion of the $96.3 billion and 119.2 million stimulus payments that the IRS distributed as of December 2008.

However, unless controls are improved, TIGTA estimates that approximately $117.6 million in false refunds could be erroneously released over the next five years due to the expiration of a temporary freeze within the currently established time periods. In 2008, the IRS’s Criminal Investigation Division changed the controls and implemented a temporary freeze to hold the issuance of potentially false refunds. TIGTA’s limited testing identified that $1.2 million in stimulus payments and $16.3 million in false refunds were inappropriately issued because the temporary freeze was released due to processing delays or systemic deficiencies. The temporary freeze is programmed to expire within a certain time period. Thus, if a false refund account is not worked or referred for resolution on a timely basis, the account is at risk of having the refund erroneously issued because the temporary freeze expires.

“Although the amount of erroneously identified stimulus payments is small in relation to the total amount issued, TIGTA remains concerned that the existing controls pose a risk that false refunds and stimulus payments will be erroneously issued in the future,” said TIGTA Inspector General J. Russell George in a statement. “Allowing false stimulus payments or false refunds to be issued reduces the dollars in the Treasury, which is especially critical in this current economic environment.”

TIGTA previously reported that the temporary freeze may not give the IRS sufficient time to verify false refunds and that the freeze process used by the Criminal Investigation Division was complex and confusing.  In response to these findings, the CI Division implemented new processes in processing year 2008 to prevent false refunds from being issued. However, TIGTA found that the controls were not always working as the IRS believed they would. If the IRS does not take corrective actions, it will continue to be at risk of allowing false refunds to be issued. 

TIGTA recommended that the IRS extend the time period for the temporary freeze to provide more time to verify potentially false returns and prevent the issuance of false refunds, and establish a quality review process that will identify false returns that are not automatically transferred for action. The IRS disagreed with these recommendations, but agreed to seek a legal opinion on whether a rebate recovery credit calculated by the IRS requires the issuance of a statutory notice of deficiency.

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