Computer program cost IRS $318 million

WASHINGTON – The Internal Revenue Service gave away $318 million in improper refunds this year because a computer program that screens tax returns for fraud wasn’t working, according to a report released Friday.

The estimate 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 to $300 million in improper refunds.

The inspector general plans a future 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 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 computer program, in use since 1996, searches for signs of fraud in every tax return claiming a refund.

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 this spring’s tax filing deadline.

The IRS is now trying to get the program running in time for next year’s deadline. The refund fraud program stopped $412 million in fraudulent returns in 2005.

The House’s top tax writer, in a letter to Treasury Secretary Henry Paulson this summer, asked that the IRS re-examine 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 Chairman Bill Thomas, R-Calif. “Remarkably poor judgment riddled the project.”

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