The Internal Revenue Service needs to screen and monitor electronic filing providers more carefully, according to a new government report.

The report, by the Treasury Inspector General for Tax Administration, found that while the IRS has an effective process for ensuring applicants meet age requirements and have no tax compliance issues, TIGTA found that the IRS is not consistently verifying that new applicants are U.S. citizens or legal aliens authorized to work in the United States.

As of June 21, 2009, there were 207,419 electronic return originators who e-filed about 61 million (66 percent) of the approximately 92 million e-filed tax returns accepted in 2009. To become an e-file provider, an applicant must meet required screening and verification checks. Applicants must be U.S. citizens or legal aliens and at least 21 years of age. An applicant who is not an attorney, CPA or an enrolled agent must supply a fingerprint card, which is used to conduct a criminal background check.

The report found that the IRS also needs to verify that some e-file providers claiming nonprofit status are indeed nonprofit organizations. Nonprofits are excluded from all e-file program requirements and suitability checks that for-profit organization must complete. The IRS did not verify the nonprofit status of some e-file providers participating in the IRS’s Volunteer Program. The Volunteer Program provides no-cost federal tax return preparation and e-filing services to low-and moderate-income taxpayers who are elderly, disabled or have limited-English proficiency.

TIGTA also found that the IRS does not always follow its procedures for monitoring e-file providers, such as properly identifying e-file providers for site visits, conducting follow-up visits or reporting trends to the IRS’s Criminal Investigation Division to discuss issues or problems.

"Inadequate screening and monitoring increases the risk to both the taxpaying public and the federal government for potential losses associated with unscrupulous e-file providers," said TIGTA Inspector General J. Russell George in a statement.

TIGTA made six recommendations to the IRS, including that it ensure that citizenship and not-for-profit status are verified for all e-file program applicants. The IRS should also ensure that monitoring-visit procedures are being followed, and the results of the monitoring visits are used to improve the effectiveness of the e-file program.

The IRS agreed with all but one of TIGTA’s six recommendations. It disagreed with TIGTA’s recommendation that it verify citizenship because of concerns that pending legislation mandating e-file for most return preparers would require the IRS to modify current citizenship rules. TIGTA said the IRS should continue to ensure that all U.S.-based e-file providers should have a valid Social Security number and pass a citizenship test.

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