Late receipt of wage reporting documents such as W-2 forms is reducing the capabilities of the Internal Revenue Service’s new system for reducing tax fraud, according to a new report.

The report, from the Treasury Inspector General for Tax Administration, noted that the IRS began using the Return Review Program last year as its main individual tax refund fraud identification and selection system. The IRS replaced the Electronic Fraud Detection System with the RRP after tests found the RRP identified more fraudulent tax returns at a lower rate of false detections. The RRP also offers real-time filtering capabilities and promises to improve the IRS’s ability to detect and prevent fraud.

The RRP includes processes to match Forms W-2, Wage and Tax Statement, submitted by employers to income and withholding information reported on tax returns at the time tax returns are processed. However, third-party Forms W-2 aren’t always available at the time a tax return is filed, even though Congress moved up the due date for filing the W-2 and W-3 forms to Jan. 31, starting with the 2017 filing season.

Despite that change, TIGTA’s analysis indicated the IRS processed nearly 244 million tax year 2016 Forms W-2 through July 27, 2017, but of those, more than 29 million Forms W-2 (or 12 percent) from more than 2.4 million employers (that is, 37 percent) were processed by the IRS after Feb. 16, 2017.

TIGTA’s review of 1.6 million tax returns selected by the RRP and the Dependent Database during processing year 2017 also identified 3,253 tax returns for which the required transaction code that was needed to delay the processing of the tax return did not post as required due to Master File programing issues. Of these tax returns, 1,146 returns had potentially erroneous refunds issued, totaling $7.7 million.

On top of that, TIGTA’s review of 55,701 paper-filed tax returns selected by the RRP in processing year 2017 identified 1,033 tax returns selected for potential fraud that weren’t controlled in the case management system. As a result, those tax returns weren’t checked by the IRS for income and withholding verification.

In addition, TIGTA identified 278 tax returns claiming refunds totaling $404,926 with a full-year prisoner indicator that weren’t selected by the RRP for fraud treatment as required because of programming issues.

TIGTA recommended the IRS ensure that the 1,033 tax returns not tracked by its case management system are worked on, and it suggested the IRS develop a process to make sure all potentially fraudulent tax returns identified are tracked by the case management system for income and withholding verification. The IRS should also ensure that programming changes are made to require RRP models and rules to complete processing before making fraud selections, the report recommended.

The IRS agreed with all four of TIGTA’s recommendations and said it plans to take action or has implemented programming changes that address the issues identified by TIGTA.

“The RRP was designed as the replacement for the Electronic Fraud Detection System (EFDS), a legacy system that, due to age and design, presents a challenge in our ability to quickly adapt to the emerging and ever-evolving tactics used to attempt refund fraud,” wrote Kennth Corbin, commissioner of the IRS’s Wage and Investment Division, in response to the report. “We appreciate the report’s recognition that the RRP has matched fraud detection capabilities that had been available in the EFDS. In fact, the capabilities of the RRP far exceed those of the EFDS and have permitted us to develop new processes for identifying potential refund fraud and other indicators of noncompliance with the tax law.”

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