IRS revives fraud detection system

Oversight of the Electronic Fraud Detection System Restoration Activities Has Improved, but Risks Remain

The Internal Revenue Service significantly strengthened management so it could restore a version of its Electronic Fraud Detection System (EFDS) earlier this year after the agency fell victim to $318 million in fraudulent refunds last year because a vendor failed to deliver an online version.

The IRS improved executive oversight and project management controls, including requiring that the status and risks of the project be reported at various meetings. The agency also met regularly with contractors to ensure that tasks were on schedule and risks addressed.

“As a result, project risks are being identified and mitigation actions are being taken to ensure that the system is implemented and fraudulent refunds stopped during Processing Year 2007,” said Michael Phillips, deputy inspector general for audit, Treasury Inspector General for Tax Administration (TIGTA).

The agency spent $20.5 million last year on the system that Computer Sciences Corp. was unable to deliver on time, and it could not restore the current client/server version of the system for last year’s tax season. The IRS had treated the system as a steady-state project instead of an application development project that demanded more scrutiny, TIGTA said.

EFDS screens all returns requesting a refund to identify improper refund claims and stop them from being issued.

While the IRS has focused on restoring the existing EFDS for this year’s tax season, Mitre, hired by the IRS to evaluate the system, said the Web-based EFDS application and database could be implemented with more work in the future.

TIGTA also found issues with a recent $3 million CSC contract for restoration work on the system. Payment of CSC’s fee is not dependent on timely delivery of system milestones. The contract also established a cost-sharing amount not to exceed $3 million as an equitable adjustment to compensate the IRS for the cost to restore the client/server version of the system. The IRS may not receive the full amount of the adjustment because the agreement does not include a provision to refund any unused adjustment to the IRS.

Since the audit, the IRS has modified its task order to make sure it receives the full adjustment. It also extended the base period and included additional work within the scope of the cost-sharing agreement, said IRS Chief Information Officer Richard Spires in a letter in response to TIGTA.

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