Revamping IRS Electronic Fraud Detection Could Waste $18 Million a Year

Mark Van Scyoc/

A new Treasury audit found the IRS planned to run the new and old systems simultaneously.

The Internal Revenue Service's attempt to update its fraud detection system could wind up wasting millions of dollars a year, a new audit finds. 

A report from the Treasury Inspector General for Tax Administration concluded the IRS didn't have an efficient plan for replacing the decades-old Electronic Fraud Detection System with the newer version, called the Return Review Program.

Running the two systems simultaneously could cost taxpayers $18.2 million a year, mostly from additional operations and maintenance costs, according to the report. 

EFDS, installed in 1994, is the "frontline system" for identifying fraudulently filed tax returns, the report said. A Government Accountability Office report earlier this year described how the filtering mechanism can search for multiple returns with the same address or bank account as potential indicators of fraud. 

The IRS has received feedback indicating the EFDS technology is "reaching technical obsolescence" and that getting contractors to maintain the old technology "is becoming increasingly difficult to obtain," the IG report said.

But plans to replace the system with the new one are still uncertain. IRS hasn't yet chosen a termination date or finalized a plan for shutting the system down. 

The IG recommended IRS' chief technology officer create a clear retirement plan for EFDS, and that the agency swiftly replace it as soon as it confirms the new system can identify potential fraud at least as effectively as the 1990s-era technology. 

According to the report, IRS agreed with the recommendations, and plans to finalize an EFDS retirement plan by January 2016. 

In June, the IRS said it was also considering issuing new identity-theft protections, such as annual unique passcodes for each taxpayer, after identity thieves filed for 15,000 fraudulent tax refunds after accessing information from 100,000 tax returns. 

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