The Internal Revenue Service needs to improve its criminal fraud referral process as well as the timeliness of its evaluation process for referring cases of tax fraud for criminal prosecution, according to a new government report.

The report, from the Treasury Inspector General for Tax Administration, acknowledged that fraud referrals made to the IRS’s Criminal Investigation unit in fiscal year 2012 have increased.  This has subsequently resulted in an increase in the number of criminal investigations and prosecution recommendations.  In addition, Criminal Investigation special agents provided thorough written feedback to the referring operating divisions when they rejected the referrals.

However, the reliability of data that CI used to determine the timeliness of evaluating fraud referrals is questionable. CI management did not have complete or accurate information available to make decisions because CI used incorrect and/or inappropriate data when analyzing its timeliness performance measures, TIGTA noted. In addition, IRS management did not establish goals for CI’s timeliness measures.  CI employees also did not always ensure that taxpayer accounts were properly coded.

TIGTA noted that when criminal fraud is not pursued on a timely basis, it can undermine the IRS’s deterrence efforts.  In addition, breakdowns in fraud investigation procedures can result in contact with the taxpayers that may potentially jeopardize Criminal Investigation’s ongoing investigations.

TIGTA recommended that the IRS stress the importance of capturing correct fraud referral processing data, modify the management information system or develop an alternative method to accurately calculate the fraud referral evaluation period, establish goals for the fraud referral timeliness performance measures, strengthen procedures to ensure that taxpayer accounts are properly coded, and issue a reminder to periodically review reports to ensure that taxpayer accounts are properly coded.

In response to the report, IRS management agreed with four of the five recommendations and has taken or plans to take corrective actions.  IRS management partially agreed with the third recommendation to establish goals for the fraud referral timeliness performance measures.  But while IRS management did not agree to set a percentage goal for the performance measure, TIGTA said their commitment to the policy of addressing each fraud referral within the specified time frame is acceptable and will help to ensure that fraud referrals are expeditiously reviewed.

“We continue to stress the need for our special agents to efficiently and effectively address fraud referrals and to provide relevant and detailed feedback when a fraud referral is rejected,” said an IRS CI official. “We also continue to focus on improved outreach and partnerships with our civil counterparts.  These efforts are validated by your audit findings. Criminal Investigation’s legal source investigative inventory has been strengthened as a direct result of increasing numbers of fraud referrals. There is closer cooperation between CI, the National Fraud Program (NFP), and field compliance councils. There has also been increased NFP outreach including presentations and training to more than 17,000 compliance employees in fiscal year 2011 and to nearly 16,000 compliance employees in fiscal year 2012.  These efforts have resulted in improved quality of referrals and their subsequent criminal investigations, as demonstrated by increases in the number of prosecution recommendations, the overall United States Attorney Acceptance Rate, and the average months to serve on imposed sentences.”

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