IRS: Lack of fraud detection system cost nearly $300M

Computerworld - The lack of an automated refund fraud detection system that would have allowed the U.S. Internal Revenue System to screen 2006 tax returns could cost the agency between $200 million and $300 million, the IRS told the U.S. Senate Finance Committee last week.

Computer Sciences Corp. was supposed to deliver the Electronic Fraud Detection System (EFDS) in January 2005. However, in October 2004 the IRS expressed concern that the $21 million system would not be ready on time and decided to used its existing system for the 2005 filing season, according to background information supplied to Computerworld by the IRS.

The IRS said CSC promised that a new system would be in place by January 2006, so in October 2005, the IRS decided that it would use the new system for the 2006 filing season. But CSC did not deliver a functional system, and the company was unable to put the old one in place as a contingency. As a result, neither system was used during the last filing season, according to the IRS. Then, on April 17, the IRS ordered CSC to stop work on the new system and to bring the old one back online.

That older system has so far stopped just 34% of the fraudulent claims for refunds it caught during the same period last year, the IRS said.

"The management efforts of both the IRS and its contractor to improve our automated refund fraud detection system were insufficient and are unacceptable," IRS Commissioner Mark Everson said in a statement. "Over the last several years, we've made a number of improvements to our automated systems, helping to bring in billions to the Treasury. Given this progress, I'm particularly disappointed that our efforts here have been so ineffectual."

Everson said the agency has taken the appropriate action against IRS employees who failed to act responsibly, up to and including dismissal. "We have brought in experts to help us correct the way we manage contracts as we move forward. And now that we have received third-party reports on what happened, we are reviewing our options with the contractor," he said.

Everson said the IRS is moving quickly to fix the problem with the EFDS.

CSC declined Computerworld's request for comment on the matter. But spokesman Chuck Taylor told GovExec.com that the company is "working closely with the IRS to review options and execute a plan that ensures the legacy system is operational for the 2007 filing season." CSC is one of three companies the IRS hired to update EFDS, Taylor said.

"The IRS continues to rely on a contractor that for the past two filing seasons couldn't deliver what it promised and accepted $20.5 million to deliver," Sen. Chuck Grassley (R-Iowa), chairman of the Committee on Finance, said in a statement. "Because of this contractor, the IRS's poor oversight of that contractor, and the IRS's own poor judgment, the IRS lost as much as $320 million over this botched project. That's money down the drain."

He noted that the IRS had serious concerns about the implementation of the new EFDS and yet trusted CSC to make it work.

"That trust was misplaced," Grassley said. "I might have more patience if this were the first time the IRS had a bad experience with a computer contractor, but this isn't the first time. It's far from it.

"If we really want to fight the tax gap, the IRS needs to get a handle on computer technology once and for all."