IRS, Senate committee at odds over contract

Senate Finance Committee

The Senate Finance Committee criticized July 13 the Internal Revenue Service’s automated system that finds improper tax return claims, calling the system inaccurate and greatly compromised.

Furthermore, in a statement July 14, committee Chairman Sen. Charles Grassley (R-Iowa) said contractor problems installing the Electronic Fraud Detection System (EFDS) wasted as much as $320 million. He questioned the IRS’ openness with the committee, asking whether the agency would have told Congress about the contractor problems.

“The IRS has had a multitude of problems with [information technology] contracts in the past and has wasted a huge amount of money on projects that have not lived up to expectations,” Grassley said July 13 at a hearing.

The IRS’ Criminal Investigation division uses the system as part of its Questionable Refund Program (QRP) to screen all tax returns that request a refund. The automated system improves manual screening processes for finding illegal returns.

The IRS paid the contractor about $20.5 million on developing the Web-based EFDS, but the system never materialized, Grassley said last week. Overall, the IRS lost $320 million on the botched project, he said.

“The IRS needs to be more effective in monitoring contractor performance,” Grassley said.

The agency has taken steps to correct problems, IRS Commissioner Mark Everson said in a statement July 14. The IRS took action against employees when necessary and regularly briefed Congress on problems, he added. Everson was not at the July 13 hearing.

Sen. Max Baucus (D-Mont.), the committee’s ranking member, said the IRS left the committee in the dark about EFDS.

“Do you think it’s appropriate for the executive branch to inform the Congress about sensitive matters before they become national scandals?” Baucus asked. “Because this is about to be a national scandal.”

The IRS made some improvements to its automated systems, helping bring in billions to the Treasury Department, Everson said in his statement.

“Given this progress, I’m particularly disappointed that our efforts here have been so ineffectual,” he said.

EFDS reviewed each of the 106.2 million tax refund claims filed in fiscal 2005. It and QRP identified less than one half of 1 percent of all refunds for additional scrutiny. The result was 500,000 temporarily frozen refund claims. Fewer than 200,000 of those questionable claims were held for longer than one week, according to the IRS.

“The 2006 numbers show a healthy gain in this year’s tax revenues,” Everson said. “Sound tax administration played a role in that.”

“If we really want to fight the tax gap, the IRS needs to get a handle on computer technology once and for all,” Grassley said last week.

The Treasury Inspector General for Tax Administration will soon release an investigative report on EFDS. No date is set for the release.


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