The IRS is unable to determine if it is issuing erroneous or fraudulent manual refunds to taxpayers, according to a new report.

Manual refunds typically are issued in instances where prompt payment may save the federal government interest payments or help taxpayers who are experiencing a hardship. Manual refunds are processed by hand, rather than being generated by IRS computers, and can be issued within two to three business days, as opposed to six to 16 business days for a computer-generated refund.

The Treasury Inspector General for Tax Administration acknowledged in its report that the IRS has taken steps to minimize the risk associated with refunds issued outside of its computerized systems, but found that the IRS could not easily identify potentially fraudulent or erroneous manual refunds.

Those refunds amount to a great deal of money. In 2007, the IRS issued approximately 184,000 manual refunds totaling over $1.5 billion to individual taxpayers and approximately 70,000 manual refunds totaling almost $32 billion to business taxpayers.

TIGTA found the IRS has begun taking steps to reduce the risk of issuing erroneous manual refunds, including requiring that the employees who input manual refund requests into the IRS's computers are different from those who authorize payment. TIGTA also determined that although employees are required to seek written approval from a manager for manual refunds, there were over 58,000 manual refund transactions for which the IRS's electronic data files did not accurately identify the IRS employees requesting such refunds.

“Due to inaccurate and incomplete data, the IRS is unable to readily determine if erroneous or fraudulent manual refunds are being issued,” said TIGTA Inspector General J. Russell George in a statement. “Given the large dollar amounts involved, errors in processing manual refunds could result in a significant loss of revenue to the federal government.”

TIGTA recommended that the IRS ensure that the identity of employees requesting manual refunds be entered on IRS computers and that the IRS develop an agency-wide process for management approval of manual refunds. IRS management agreed with TIGTA’s recommendations and is taking corrective actions.

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