TIGTA: IRS must improve screening of e-file providers

The Internal Revenue Service does not adequately screen e-file providers who submit tax returns for taxpayers who electronically file their returns. Electronic return originators submit tax returns that are prepared either by their own firms or collected from a taxpayer.

The screening process typically includes checks of the provider’s criminal background, credit history and tax compliance, but they are limited, the Treasury Inspector General for Tax Administration (TIGTA) said in a report released Oct. 2.

Also, IRS does not verify the citizenship of electronic return originators. E-file providers who say they are providing a nonprofit service are exempt from the screening process even though IRS has no mechanism to verify that the provider is involved with a valid nonprofit organization.

The inadequate screening and monitoring process jeopardizes IRS’ e-file program because these providers have access to taxpayers’ sensitive information and the tax agency’s system, said J. Russell George, TIGTA’s inspector general.

“Taxpayers must have confidence that the information that they submit on tax returns is being handled by reputable and responsible individuals who have been thoroughly screened by the IRS,” he said in a statement.

As of May, IRS has authorized 259,000 electronic return originators, who electronically filed about 55 million, or 71 percent, of the 77.1 million e-filed tax returns this year. Monitoring visits are the primary means to verify that the e-file providers comply with program requirements, the report states.

Auditors also found through testing that weaknesses in IRS processes prevent the agency from measuring program performance and ensuring that e-file providers comply with the guidelines. For example, IRS procedures do not ensure that e-file providers most at risk of noncompliance are selected for monitoring visits. And IRS lacks a process to review the cases of e-file providers that are criminally investigated to identify opportunities to improve screening checks and selection criteria for monitoring visits.

“Characteristics of these cases could identify risk factors or indicators to be used to screen unscrupulous individuals from entry into the e-file program,” the report states.

IRS agreed with most of TIGTA’s recommendations to put in place procedures to verify e-file providers, including checking citizenship using the Data Master One tape, which contains data from the Social Security Administration. IRS managers also have developed a risk-based selection criterion and procedures regarding follow-up visits. IRS will publish both of these procedures by Jan. 30, 2008.

“We will continue to evaluate and improve our ability to independently verify applicants’ eligibility and suitability status,” said Richard Morgante, commissioner of IRS' Wage and Investment Division.

About the Author

Mary Mosquera is a reporter for Federal Computer Week.

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