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IRS mistake costs U.S. up to $300 million

Mary Dalrymple Associated Press

WASHINGTON – The Internal Revenue Service cost the government $200 million to $300 million this year because a computer program that screens tax returns for fraudulent refunds wasn’t operating.

The tax agency said Friday that a contractor promised to deliver by January a new version of a program, used since 1996, that searches for signs of fraud in every tax return claiming a refund.

The contractor, Computer Sciences Corp., did not produce a working program by the deadline, and IRS officials could not put the old program back into operation in time for this spring’s tax filing deadline.

As a result, the IRS has stopped only 34 percent of the fraudulent refund claims it had caught by this time last year, the tax collectors said. It estimates the loss to the government at $200 million to $300 million.

IRS Commissioner Mark Everson said the performance of the IRS and the contractor “were insufficient and are unacceptable.” He said the IRS did not make the problem known earlier so as not to “provide a roadmap for those who would game the system.”

Everson said he is reviewing the agency’s options with the contractor and has begun punishing or firing IRS employees. The IRS instructed the contractor to stop work on the new program and restore the old program before taxpayers file their 2007 returns.

The IRS has spent almost $21 million on the project.

Computer Sciences Corp. issued a statement Friday saying the company is working with the IRS to make sure the old system works before taxpayers file their returns next year.

Senate Finance Committee Chairman Charles Grassley, R-Iowa, said the IRS should not have trusted a contractor that repeatedly missed project deadlines, eventually costing the government millions. “That’s money down the drain,” he said.

The panel’s top Democrat, Sen. Max Baucus of Montana, said the country cannot afford to have the IRS add to the billions of taxes that go uncollected every year. “They need to end this pattern of waste and complacency that costs honest taxpayers so much money,” he said.

The tax collectors have other methods of detecting and stopping fraudulent refund claims. It compares information reported on tax returns with other government records to look for improperly large refund claims. It also tracks returns filed by prisoners to find inmates who file false returns claiming refunds.