IRS Misroutes Tips about Tax Fraud


The Internal Revenue Service improperly screens many reports of possible tax fraud submitted by taxpayers and routes them to the wrong place, according to a new government report.

SOURCE: AccountingToday

When individuals want to report possible instances of federal tax fraud by a taxpayer, the IRS instructs them to first complete and mail Form 3949-A, Information Referral, or to detail the allegations in the form of a letter.

However, many of these reports of suspected tax fraud were improperly routed and screened by the IRS, according to a new audit report released Thursday by the Treasury Inspector General for Tax Administration.
The findings come amid reports of delays and backlogs on tips at the IRS’s Whistleblower Office, despite the recent expansion of the whistleblower program and an increase in the size of possible whistleblower awards (see Fewer Whistleblowers Coming to the IRS).

The TIGTA report focused more on how the IRS’s Accounts Management function receives Form 3949-A referrals and determines where to send them to be screened. Last September, TIGTA reported that the Accounts Management function misrouted referrals or sent incomplete, or unrelated referrals to the various business units and offices.

From fiscal years 2010 through 2012, the IRS’s Small Business/Self-Employed and the Wage and Investment Divisions received and screened 274,976 Forms 3949-A referrals. During that time, examinations initiated from Form 3949-A referrals resulted in more than $66.5 million in tax assessments. However, the IRS’s ineffective routing and screening processes caused many of the referrals to not be selected for examination.

Improvements to the process and better communication with the Account Management function would reduce the number of referrals the divisions receive, allowing both the SB/SE and W&I Divisions to process Forms 3949-A more efficiently and effectively. 

TIGTA determined both SB/SE and W&I Division screeners improperly screened referrals. Neither division has a routine review process to evaluate screened referrals not selected for examination. In addition, the SB/SE does not have specific guidelines or instructions for screeners to use when screening referrals. Improving the process could allow the divisions to select more referrals with examination potential.

“The IRS must ensure that it makes effective use of information from those individuals who report suspected tax fraud,” said TIGTA Inspector General J. Russell George in a statement.

“This is a critical component of the IRS’s enforcement efforts.”IRS management officials agreed with all of TIGTA’s recommendations and stated that they plan to take corrective actions. However, they also raised some objections to the methodology used in the report.

“As you note in your report, classification of this work is subjective and our screeners successfully use their personal knowledge base and professional judgment during the screening process in the absence of formal screening guidelines,” wrote Faris R. Fink, commissioner of the IRS’s Small Business/Self-Employed Division. “We agree formal screening guidelines, more structured reviews, and a refined feedback process would further improve this program. However, we have some concerns with the statistical data presentation, specifically, with the lack of inclusions of confidence intervals when reporting error rates for the sampled cases. In addition, we believe the statement in the report, ‘For every $1 spent to screen referrals, examinations assessed approximately $140,’ may be misleading as this does not take into account the cost of performing the examinations resulting in the referenced monetary outcome.”

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