Software Delay Said to Cost IRS $318 Million in Overpaid Refunds

Associated Press
Saturday, September 2, 2006

The Internal Revenue Service gave away $318 million in improper refunds this year because a computer program that screens tax returns for fraud was not working, according to a report released yesterday.

The program, in use since 1996, searches for signs of fraud in every tax return claiming a refund. In 2005, it stopped $412 million in fraudulent returns.

The IRS had contracted with Computer Sciences Corp. to update the program, but the contractor could not produce a working program by the deadline. The old program could not be put back into operation in time for the spring 2006 tax-filing deadline.

The IRS is trying to get the program up and running in time for the 2007 deadline.

The estimate released yesterday by the Treasury inspector general for tax administration is slightly higher than the IRS's own calculation. The tax agency thought it had paid out $200 million to $300 million in improper refunds.

The inspector general plans a study to look more closely at the amount of money the government lost, along with IRS procedures for detecting fraudulent refunds.

In this study, the inspectors found that the IRS spent more than $20 million on the failed computer project, which should have delivered a new version of the fraud-detection program early this year.

The House's top tax writer, in a letter to Treasury Secretary Henry M. Paulson Jr. this summer, asked that the IRS reexamine its relationship with the contractor and make sure other IRS programs aren't in jeopardy.

"This failure has cost taxpayers hundreds of millions of dollars and has worked to the benefit of criminals who intentionally filed false returns to defraud the federal government," said Ways and Means Committee Chairman Bill Thomas (R-Calif.). "Remarkably poor judgment riddled the project."

IRS Commissioner Mark W. Everson has said the performance of the agency and the contractor were "insufficient and are unacceptable."

The IRS followed other leads and stopped $94 million in fraudulent refunds from being issued this year, the inspectors found, even though they could not use the computer program.

© 2006 The Washington Post Company