Management of tax fraud detection system improves

Oversight of the Internal Revenue Service's electronic system for catching falsified tax returns has improved, but critical work remains, according to an audit report released Tuesday.

Agency officials have corrected several problems involving the management of the Electronic Fraud Detection System, the report from the Treasury Inspector General for Tax Administration stated. The agency beefed up oversight by requiring status and risk reports at various meetings, auditors found.

Regular meetings have been held with stakeholders and contractors, for instance, to ensure tasks are on time and risks are addressed, the IG stated.

The electronic detection system is used by the IRS Criminal Investigation Division as part of a program started in January 1997 to stop fraudulent refund claims on income tax returns.

The system wasn't operational last tax season because the IRS and its contractors tried (but failed) to launch a Web-based version without keeping the original in place as a backup. This lapse contributed to about $318.3 million in fraudulent refunds being issued as of May 19, 2006.

After the attempt to launch a Web-based system failed, the office in charge of the project spent about $1.7 million to hire Booz Allen Hamilton to help with the management of system and obtain "independent assessments" from MITRE, a nonprofit corporation that provides systems engineering and information technology support to the government.

The audit report stated that this was an inefficient use of funds, since the consultants would not have been needed had the Web version of the system been implemented last year.

Meanwhile, the original system was back up and running again on Jan. 16, 2007, according to the IRS. The report stated that as of December 2006, the agency paid Computer Sciences Corp., the contractor working on the system, $2.6 million for restoring the original.

But the agency may have difficulty receiving a $3 million equitable adjustment payment related to the restoration work from CSC, the IG report said.

Richard Spires, chief information officer for the IRS, said in response to the report that the agency had prepared the necessary paperwork to ensure it receives the full adjustment.

Auditors also noted that oversight of the project on the contractor's end had not changed significantly, but that the IRS project office is drafting a set of procedures for monitoring the agency's acquisitions.