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IRS nUNG SYSTEMS VULNERABLE TO TAX
REFUND FKAUD

Y 4. U 36: 103-52

IRS Filing Systens Uulnerable to Ta...

HEARING

BEFORE THE

SUBCOMMITTEE ON OVERSIGHT

OF THE

COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES

ONE HUNDRED THIRD CONGRESS

SECOND SESSION

FEBRUARY 10, 1994

Serial 103-52

Printed for the use of the Committee on Ways and Means

JON 2 7 J994

U.S. GOVERNMENT PRINTING OFFICE
77-603 CC WASHINGTON : 1994

For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
ISBN 0-16-044068-8

IRS nUNG SYSTEMS VULNERABLE TO TAX
REFUND FKAUD

Y 4. W 36; 103-52

IRS Filing Sgstens Uulnerable to Ta. . .

HEARING

BEFORE THE

SUBCOMMITTEE ON OVERSIGHT

OF THE

COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES

ONE HUNDRED THIRD CONGRESS

SECOND SESSION

FEBRUARY 10, 1994

Serial 103-52

Printed for the use of the Committee on Ways and Means

'^^ff^itmmaHuii^,,^^

JUn 2 7 1934

U.S. GOVERNMENT PRINTING OFFICE
77-603 CC WASHINGTON : 1994

For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
ISBN 0-16-044068-8

COMMITTEE ON WAYS AND MEANS
DAN ROSTENKOWSKI. Illinois. Chairman

SAM M. GIBBONS, Florida
J.J. PICKLE, Texas
CHARLES B. RANGEL, New York
FORTNEY PETE STARK, California
ANDY JACOBS, Jr., Indiana
HAROLD E. FORD, Tennessee
ROBERT T. MATSUI, California
BARBARA B. KENNELLY, Connecticut
WILLIAM J. COYNE, Pennsylvania
MICHAEL A. ANDREWS, Texas
SANDER M. LEVIN, Michigan
BENJAMIN L. CARDIN, Maryland
JIM McDERMOTT, Washington
GERALD D. KLEC?;KA, Wisconsin
JOHN LEWIS, Georgia
L.F. PAYNE, Virginia
RICHARD E. NEAL, Massachusetts
PETER HOAGLAND, Nebraska
MICHAEL R. McNULTY, New York
MIKE KOPETSKI, Oregon
WILLIAM J. JEFFERSON, Louisiana
BILL K. BREWSTER. Oklahoma
MEL REYNOLDS, Illinois

BILL ARCHER, Texas
PHILIP M. CRANE, Illinois
BILL THOMAS, California
E. CLAY SHAW, Jr., Florida
DON SUNDQUIST, Tennessee
NANCY L. JOHNSON, Connecticut
JIM BUNNING, Kentucky
FRED GRANDY. Iowa
AMO HOUGHTON. New York
WALLY HERGER, California
JIM MCCRERY. Louisiana
MEL HANCOCK, Missouri
RICK SANTORUM. Pennsylvania
DAVE CAMP. Michigan

Janice Mays, Chief Counsel and Staff Director
Charles M. Brain, Assistant Staff Director
Phillip D. MoselEY, Minority Chief of Staff

Subcommittee on Oversight

J.J. PICKLE, Texas, Chairman

HAROLD E. FORD, Tennessee
CHARLES B. RANGEL. New York
WILLIAM J. JEFFERSON, Louisiana
BILL K. BREWSTER, Oklahoma
GERALD D. KLECZKA, Wisconsin
JOHN LEWIS, Geoiigia

AMO HOUGHTON, New York
WALLY HERGER, California
MEL HANCOCK, Missouri
RICK SANTORUM. Pennsylvania

(II)

CONTENTS

Page

Press release of Monday, January 31, 1994, announcing the hearing 2

WITNESSES

U.S. Department of the Treasury, Internal Revenue Service, Hon. Margaret
M. Richardson, Commissioner, Michael Dolan, Deputy Commissioner, and
Ted F. Brown, Refund Fraud Executive 22

U.S. General Accounting Office, Jennie S. Stathis, Director, Tax Policy and
Administration Issues, and David J. Attianese, Assistant Director, Tax
Policy and Administration Issues 38

Becht, Barry, Goldsboro, N.C 5

Todd, Frazier B., Jr., Atlanta, Ga 8

SUBMISSION FOR THE RECORD
Electronic Filing Coalition, statement and attachment 72

(III)

IRS FILING SYSTEMS VULNERABLE TO TAX
REFUND FRAUD

THURSDAY, FEBRUARY 10, 1994

House of Representatives,
Committee on Ways and Means,

Subcommittee on Oversight,

Washington, D.C.
The subcommittee met, pursuant to call, at 10 a.m., in room
B-318, Raybum House Office Building, Hon. J.J. Pickle (chairman
of the subcommittee) presiding.

[The press release announcing the hearing follows:]

(1)

FOR IMMEDIATE RELEASE PRESS RELEASE #19

MONDAY, JANUARY 31, 1994 SUBCOMMITTEE ON OVERSIGHT

COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
1135 LONGWORTH HOUSE OFFICE BLDG.
WASHINGTON, D.C. 20515
TELEPHONE: (202) 225-5522

THE HONORABLE J. J. PICKLE (D., TEXAS), CHAIRMAN,

SUBCOMMITTEE ON OVERSIGHT, COMMITTEE ON WAYS AND MEANS,

U.S. HOUSE OF REPRESENTATIVES,

ANNOUNCES A HEARING ON TAX REFUND FRAUD

The Honorable J. J. Pickle (D., Texas), Chairman, Subcommittee on
Oversight, Committee on Ways and Means, U.S. House of Representatives,
announced today that the Subcommittee will hold a hearing on Internal
Revenue Service (IRS) efforts to identify ctnd prevent touc refund fraud,
particularly with regard to electronically filed returns. The hearing
will be held on Thursday, Febiruary 10, 1994, beginning at 10:00 a.m.,
in room B-318 Raybum House Office Building. IRS Commissioner
Margaret Milner Richardson and individuals involved in tax refund
schemes will appear as witnesses at the hearing.

In announcing the hearing. Chairman Pic)cle stated, "IRS continues
to be challenged by taxpayer schemes to defraud the tax system for
refunds that they are not entitled to. Each year, individuals and tax
preparers are becoming more sophisticated in devising ways to cheat the
system. While IRS is taking steps to detect fraud, the agency also, to
a large degree, is playing "catch-up."

"The Subcommittee needs to assess what IRS is doing up- front to
prevent tax refund fraud and what actions are being taken against
parties who defraud the teix system. While criminal action against
abusers is important, tax refund fraud is not an issue that can be
'prosecuted away.' IRS must be more diligent in implementing
procedures to eliminate fraud before refunds are issued. Further, with
IRS's goal of having 80 million taxpayers file electronically by year
2000, the agency must deal with this type of growing fraud now, before
it's too late. Electronic-filing fraud is a serious enforcement
problem for IRS because of the speed with which electronically filed
returns are processed and refunds issued."

BACKGROUND :

In 1993, IRS identified about twice as many paper and electronic
tax returns involving fraudulent refund claims than were identified in
1992. IRS detected approximately 36,000 fraudulent refund claims on
paper returns involving about $61 million in refunds, and about 25,000
fraudulent refund claims made through electronically filed returns
involving about $53 million in refunds. In 1992, IRS identified about
12,000 fraudulent refund claims on paper returns involving about
$33 million in refunds, and about 15,000 fraudulent refund claims made
through electronically filed returns involving about $34 million in
refunds.

In 1993, IRS was able to stop payment of only 86 percent of the
$61 million in fraudulent refunds claimed on paper returns, and only
54 percent of the $53 million in fraudulent refunds claimed on
electronically filed returns. As a result, IRS lost at least
$33 million due to refund fraud. Furthermore, IRS has no way of
assessing whether the agency is catching all, most, or only a small
amount of tax refund fraud.

In 1994, IRS plans to use a variety of existing and new procedures
to detect fraud involving both paper and electronically filed returns.
IRS will continue to use: computer criteria to screen potentially
fraudulent refund claims; the box known as the "funny box" for flagging
paper returns filed at the Service Center that look suspicious; and
checks in the electronic filing program such as rejecting returns with
invalid Social

(MORE)

Security numbers rejecting returns from first-time filers, and delaying
issuance of refunds for certain "high-risk" returns. In addition,
several new concepts will be used by IRS, such as: artificial
intelligence to detect broad -reaching and sometimes national refund
fraud schemes, and "tiger teams," which are groups of IRS experts
responsible for developing possible fraud schemes and testing IRS's
systems to insure the schemes are detected.

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

Persons submitting written comments for the printed record of the
hearing should submit six (6) copies by the close of business,
Wednesday, March 2, 1994, to Janice Mays, Chief Counsel and Staff
Director, Committee on Ways and Means, U.S. House of Representatives,
room 1102 Longworth House Office Building, Washington, D.C. 20515.

FORMATTING REOUIREMENTS :

Each statamsnl presented for printing to ttw CommiSee by ■ witneu. any written statement or exhbit sutHnitted for tht pnnted record or any
written comments in response to a request tor wnoen comments must confonri to the guidelirtes listed below Any statement or exhibit not in
complance with these guOalines will not be pmied. but win be mantaned n the Committee fUes for revnw and use by the Committee

1 . All statements and any accompanyng exhibia for pnnting must be typed in single space on legalize paper and may not exceed a total
of 10 pages.

2. Copies of \i>hols documents submMad as exhM material «•■ not be acceplad tor printing Instead, axhM material ahould be leiaranoad
and quoted or paraphrased AI exh(b< mateiial not meeting these apadficalions wfl be maintaned in the Cocnniltee tiles tor re«ew and
use by the Commaiee

3 Statements rrtust contain ttie name and capacity in which the i«ritness will appear or. for written comments. tt>e name and capacity of ttie
person submtbrig the statement as wel as any dMnts or persons, or any organization for whom the w^ess appears or for whom the
statement » submitted

4 A supptementai sheet must accompany each staterrient listing ttw name, ful address, a telephone numtier wtiere tt>e witness or ttie
designated representative may be reached and a topcal outsr^e or summary of the comments and recofTimendsbons in the fol statement
Ths supptementai stieet iiril not be ndixJed vi tt>e pmied record

The above restndions and Ifnistions apply only to material bang submoed for pnnling Staterrwnts and eihib<s or supplementary matenal
submitted solely tor datrtiution to the Members, the press and the pubtc dunng the course of a publK heanng may be submitted in other fomis

Chairman PiCKLE. We will ask the subcommittee to please come
to order and also ask our guests to please take their seats.

I have an opening statement and Mr. Houghton has an opening
statement and other members of the committee, as they arrive,
may also, but we have a reasonably lengthy session today and we
want to get with it.

Today the subcommittee will examine the vulnerability of IRS's
filing system to tax refund fraud and what the IRS is doing to ad-
dress this fraud. The Oversight subcommittee has long been con-
cerned that the IRS is being ripped-oflf by criminals taking advan-
tage of weaknesses in the IRS' filing system.

In 1991, subcommittee members personally visited the IRS'
Questionable Refund Fraud Team at the Memphis Service Center.
At that time, we reviewed IRS' process for identifying and pros-
ecuting tax refund fraud, and urged the IRS to do more and tell
us what we could do to help. This problem, particularly in the area
of EITC, was brought to our attention by members of the Memphis
Service Center, who said there was a serious fraud problem in-
volved here.

Over the past several years, the subcommittee has commissioned
the U.S. General Accounting Office to review IRS' tax refund fraud
problem for which reports were issued to this subcommittee in May
1989 and in December 1993. In both instances, GAO warned us
that close attention should be given to tax refund fraud and rec-
ommended improvements to IRS' systems. Some of these rec-
ommendations have been implemented by the IRS.

Most recently, the subcommittee reviewed several internal IRS
reports prepared in 1993 by the IRS Office of Internal Audit and
an individual under contract. That is the report of an individual
under contract with IRS concerning IRS' fraud detection efforts. I
think we will all agree that tax refund fraud is not a new phenome-
non nor is it likely to disappear overnight or disappear altogether.
However, it is critical that the public know: (1) whether the IRS
clearly knows and understands the scope, magnitude and nature of
the problem; (2) whether the IRS has a comprehensive fraud con-
trol program in place; and (3) whether the IRS is able to effectively
adjust its fraud controls as the world changes to quickly deal with
criminals' continuing efforts to circumvent the traps.

In my judgment, the IRS has almost perfected the art of using
its computers to give out tax refunds quickly without making a cor-
responding effort in the area of fraud controls. It seems that to
some degree the IRS is speeding down the highway at night with
its headlights off hoping to avoid oncoming traffic. Perhaps the IRS
needs to pull into a rest stop and pull out a map.

The IRS Commissioner today will present detailed testimony con-
cerning the IRS' recent efforts to deal with tax refund fraud and
IRS' future plans to be more aggressive. I applaud her for leading
the agency in the right direction and commitment to addressing
this problem. At the same time, as a result of the subcommittee's
investigation and review of IRS reports leading up to this hearing,
I have concluded that the situation is worse than originally
thought.

The fact of the matter is that fraud exists and it is a serious
problem. It is not my intent today to use this hearing to expose

specific IRS weaknesses or to provide a road map for would be
crooks. Rather, my goal is to make sure that the IRS is in full gear
in stopping fraud, that it is accountable to the public, and where
IRS is unable to act because of resources or other restraints, to tell
the Congress so that we can act and help.

The tax return filing program is not a Federal Government pro-
gram that comes and goes depending on priorities of the adminis-
tration. The tax return filing system is here to stay and affects the
pocketbook of every American. Consequently, when it falls short, I
think we should know about it.

In conclusion, I expect that the IRS Commissioner will tell it all
at today's hearing and in doing so, I believe together we can quick-
ly address any remaining system vulnerabilities during the 1994
filing season and aggressively chart out and implement additional
safeguards for the filing seasons to come.

I will ask Mr. Houghton if he wants to make an opening state-
ment.

Mr. Houghton. Thank you, Mr. Chairman. I join you in opening
our hearing on the income tax firaud issue. I appreciate your doing
it. It is timely and I believe it is important that we understand
what is going on, in the light of the IRS statistics and the increase
in fraudulent income tax refunds.

The question for us is why is this happening? It seems to me
there are two basic issues. One is the refundable nature of the
earned income tax credit, and the second is the expansion of elec-
tronic filing. We are here to find out. We are here to probe. I hope
we will shine a light on something which is of great concern to
most American citizens. Thank you.

Chairman Pickle. Thank you, Mr. Houghton.

Now, we have two witnesses to begin with. One is Frazier B.
Todd, Jr. and the other is Barry Becht. Do you gentlemen — first,
I want to swear you in as a procedure that the committee always
does.

[Witnesses sworn.]

Chairman Pickle. Let the record show that the witnesses have
said, yes.

Do either of you gentlemen want to make an opening statement
about your participation in this program or do you want us just to
ask questions?

Mr. Becht. I have an opening statement I have prepared here.

Chairman PiCKLE. All right. Do you have a statement to make
also, Mr. Todd?

Mr. Todd. Yes, sir, I do.

Mr. Becht. Good morning.

Chairman Pickle. Mr. Jefferson, do you have an opening state-
ment?

Mr. Jefferson. No, sir.

TESTIMONY OF BARRY BECHT

Mr. Becht. Good morning, Hon. Chairman Pickle, and members
of the Subcommittee on Oversight. It is an honor and a privilege
to be able to speak before you on tax refund schemes.

My name is Barry Becht, a Federal inmate, serving an 18-month
sentence at Seymour Johnson, a minimum security Federal prison

camp in Goldsboro, N.C. I am charged with aiding and assisting in
the preparation of false Federal income tax returns from the east-
ern district of Virginia in the Alexandria Federal Courthouse.

I have been incarcerated for 7 months, since July 1993, and my
release date is scheduled for August of this year. I am 36 years old.
I have been married for 10 years with four daughters, ages 8 to IV2
years old. Prior to my incarceration, I have resided in Falls
Church, Va. I have considerable experience in all phases of ac-
counting and taxation.

I have generated payroll taxes, issued W-2s, filed W-4s, 940s,
941s, sales tax returns and fixed asset schedules with depreciation.
I have had 2 years of college courses primarily in accounting, busi-
ness and Federal taxation. I have also taken the advanced income
tax preparation course offered by the H&R Block Tax Training
School.

I began preparing income taxes for friends and relatives of my
wife, who is Vietnamese, within the metro D.C. area. Through word
of mouth, our business opened in 1987 as T&B Tax Services in Ar-
lington, Va. I felt that I was using my Grod-given talents in math
and working with figures helping these clients get a tax refund.

I charged tax fees based on tne forms that I used. The average
fee per return was around $50. In the beginning, I prepared their
returns based on information they supplied. However, many clients
had not retained receipts. As the business grew and through the
clients' greed, as well as my wanting to keep their business, I
began inflating deductions, overstating expenses and getting the
clients more of a refund than they had a legal right to receive.

I had only a very small percentage of audits, so I continued doing
returns this way, from the IRS. I realized the seriousness of my ac-
tions when in September 1990 there was a search and seizure done
on my office to take all the records out and essentially close the
business. I knew that I had made a big mistake in my life for
which I am deeply sorry. I thought I was Helping clients with their
taxes, but I caused hundreds of clients a financial tax burden, and
I caused great embarrassment for my wife and family within the
community, as well as having a husband and father away in pris-
on.

I also caused the IRS headaches and for all I have done I am
deeply sorry and ask forgiveness for that.

Mr. Chairman, I have spent 7 long, difficult months in prison,
another 2^2 years under investigation from the IRS, and I have
tried to think of ways to improve myself Then, this opportunity
came up to assist and perhaps prevent tax fraud schemes. And I
feel I can be valuable to help deter preparers from going through
what I have.

If tax preparers and individuals know that they will be crimi-
nally prosecuted and that they will be detected up front for devis-
ing these tax fraud schemes, then we can begin to eliminate the
tax refund fraud. There is much work to do as there are so many
schemes developed over the years and dangerously so for electronic
returns.

I personally have signed and prepared over 4,000 tax returns
from 1987 to 1990. Through the 2-year investigation of the IRS,
they sampled 475 returns, of which 472 were fraudulent with a tax

deficiency of right around $750,000. This is what I have personally
done and that is what I have been charged with in my case. They
found this on concluding the investigation in June 1992. That
means refunds were issued to my clients and that those returns
passed through their computer criteria and what they call the
"funny box" for suspicious or conspicuous fraud.

Briefly, those returns passed because of so many different areas
used to reduce tax liabilities, child and dependent care, moving ex-
penses, employee business expenses, rental and common loss, char-
itable contributions, depreciation, business use of the home, other
taxes paid, medical expenses, all of these areas received some at-
tention but spread out so the computer red flag on criteria was able
to be passed.

Amended returns I did were done similarly, but only selected
areas were explained and used, child care, employee business ex-
penses. Schedule C for self-employment, business expenses, espe-
cially depreciation and Section 179 expense. There has to be an im-
plementation to look at supplemental forms within the tax return
much more carefully. Schedule C, Schedule E for rental, rental
losses claimed through abuses of expenses many times are totally
fabricated. Schedule Ks for corporations; that is an extremely
abused area to be able to write off personal losses, to be able to
transfer those to the taxpayer.

Form 2106, employee business expenses is greatly exaggerated
and unsupported without proper records. Form 2441, child and de-
pendent care. Even though they have changed the laws to include
the name, address and Social Security number of the recipient, it
is still an area that is abused.

Schedule A for itemized deductions, charitable contributions,
miscellaneous deductions. These forms have various schemes and
I am identifying the problems and the solutions have to come from
more selective computer criteria and these "tiger teams" that was
mentioned in the press release of experts, to be able to test the sys-
tem against these schemes.

Mr. Chairman and subcommittee members, in concluding, I
would very much like to be a part of this team because it will be
a team effort. Of course, as you know I am still incarcerated in
prison, on the last 6 months of my sentence. If the remainder of
my sentence could be under a home confinement arrangement, I
could devote these months to community service. I would devote
my time with proper supervision in helping to develop detection of
tax refund fraud schemes.

I am here to cooperate and answer any questions that you may
have, and I thank you, Mr. Chairman and subcommittee members.

Chairman PlCKLE. Thank you for a very forthright statement and
it will be a helpful statement, I think, to all of us.

I have some questions, but let me ask, Mr. Todd, do you have a
statement to make?

Mr. Todd. Yes, I do.

Chairman PiCKLE. Is it a relatively brief statement?

Mr. Todd. Yes.

Chairman Pickle. Go ahead.

TESTIMONY OF FRAZIER B. TODD, JR.

Mr. Todd. Grood morning, Mr. Chairman and members of the
Subcommittee on Oversight. My name is Frazier Todd, Jr. I am 35
years of age, divorced, with four children and my home is Atlanta,
Ga. I have been incarcerated since April 1, 1992, for the charges
of conspiracy to file false claims with the Government.

These charges involved a fraudulent tax refund scheme with elec-
tronically filed returns. I was sentenced to 30 months incarceration
followed by a period of 3 years supervised release. I am presently
serving my sentence at Federal Prison Camp Seymour Johnson, lo-
cated in Goldsboro, N.C.

I was originally scheduled to be released on February 3, 1994,
which was last week, to serve the last 4 months of my sentence in
a halfway house, but due to overcrowding of halfway houses my in-
carceration has been prolonged an additional 2 months and I am
now scheduled to be released April 4 of this year to serve the last
2 months of my sentence at a halfway house.

I attended high school in San Francisco, graduated from Wood-
row Wilson. I attended the Computer Learning Center and received
a computer operations certificate in San Francisco. I moved to At-
lanta, Ga., in 1983 and attended Massey Business College and re-
ceived an associate degree in business administration and later at-
tended St. Leo's College located on the Army Base at Fort McPher-
son in Atlanta, Ga., and completed my bachelor of science degree
there in 1988.

I worked for a CPA firm in Atlanta during the summer months
in 1985 and 1986 while attending college. I opened Todd & Associ-
ates in 1988 and maintained an office in Atlanta, Ga., for the pur-
poses of providing accounting and tax services.

I remained sel^emploved up until the time my business was shut
down August 16, 1991 by the IRS Criminal Investigation Division
pending an investigation of fraudulent activities involving the elec-
tronic filing of false income tax returns through that business. The
conduct of the scheme involved the recruiting of real persons to
provide me with their real names and their correct Social Security
numbers.

Criteria for selecting these people recruited were individuals who
did not work or were not required to file returns, individuals who
were not in default of student loans guaranteed by the U.S. Grov-
ernment, and individuals without child support obligations, individ-
uals without tax liabilities from any previous year. Most of the peo-
ple recruited for this scheme were women, primarily in low-income
housing projects because in most cases, they qualified with the
aforementioned criteria.

After an individual was recruited, a wage and tax statement
form W-2 was prepared using that individual's real name and cor-
rect Social Security number on the W-2 form. The W-2 form would
also reflect information with respect to that individual's supposed
employment.

Fictitious employer names and addresses were used with real
employer identification numbers obtained from the IRS by complet-
ing the Form SS-4 application for employer identification number.
These employer identification numbers are easy to obtain through
the Paperwork Reduction Act. The IRS has a provision whereby

new employer identification numbers can be issued and obtained
over the telephone in less than 5 minutes.

The information on the W-2 forms was used to prepare the in-
come tax return and complete the Form 8453 and also complete the
refund anticipation loan application. These documents were used to
electronically transmit the returns to the Internal Revenue Service.

I want to thank you for this opportunity to testify and I will be
happy to answer any questions that you may have. Thank you, Mr.
Chairman.

Chairman Pickle. I thank you also, Mr. Todd, for a very frank
statement analysis of how you proceeded. I am sure other members
will have a lot of questions.

Let me ask a few questions. Are either of you, are you a CPA?
Did you study to be a CPA, Mr. Becht?

Mr. Becht. No. I took 2 years of college in primarily business
and accounting courses.

Chairman PiCKLE. Mr. Todd, you did essentially the same thing?

Mr. Todd. Yes.

Chairman Pickle. When you applied to become an ERO, an elec-
tronic refund return, you applied to the IRS?

Mr. Becht. I am not an electronic — I did not even enroll as a tax
preparer.

Chairman PiCKLE. Did you have a tax preparer? Did you work
through a tax preparer?

Mr. Becht. I am a tax preparer, but I didn't need to apply for
any tax preparer

Chairman PiCKLE. Did you fill out some kind of a form?

Mr. Becht. No. I filled out 1040s and signed as the preparer of
tax returns. That is all that is necessary in the system.

Mr. Todd. I was an ERO, an electronic return originator.

Chairman PiCKLE. You were an ERO?

Mr. Todd. Yes.

Chairman PiCKLE. Did you apply to IRS?

Mr. Todd. Yes. I completed the application and then there was
a suitability check performed and after that

Chairman PiCKLE. By IRS?

Mr. Todd. Yes.

Chairman PiCKLE. And you had an office and did they visit you
in your office or did they just write you

Mr. Todd. They wrote me. They didn't visit me. They wrote me
and sent me the information that I would need to get online with
their commuter system to transmit the returns electronically.

Chairman Pickle. I think it should be observed that both of you
were apprehended, I assume, through the detective or surveillance
work of IRS and they caught you?

Mr. Becht. Yes.

Chairman PiCKLE. It ought to be shown that IRS did identify you
and now you are in prison so it is not that they are not effective
at all or you wouldn't be here now.

Essentially, Mr. Becht you have listed 15 or 20 things that

Mr. Becht. There are more.

Chairman Pickle. That can be puffed up or cut back or changed
or altered, and you just did them at random and nobody questioned

you. You filed these returns and the Government paid out some
$750,000?

Mr. Becht. That was identified in the statement of facts.

Chairman Pickle. It could have been more, but at least
$750,000?

Mr. Becht. Yes.

Chairman PiCKLE. Was that over a period of 1 year or 2 years?

Mr. Becht. Between 1987 and 1990. They might have attempted
this, but they didn't begin their investigation or conclude the inves-
tigation until 1992.

Chairman Pickle. Can you tell me how you found people? Mr.
Todd said he recruited people to file. Did you go out and find these
people?

Mr. Todd. Yes, I did.

Chairman Pickle. How did you find them?

Mr. Todd. Well, I had a person that I hired to select these indi-
viduals for me. I gave that individual the criteria that I wanted
when he selected the people.

Chairman Pickle. Who was he? Who was the person you hired
to find these people?

Mr. Todd. It was a person who

Chairman Pickle. Mr. Todd, I don't want to try to identify the
people and have the IRS go after them. You don't have to mention
the name.

Mr. Todd. I hired an individual.

Chairman Pickle. He went down to where poor people lived and
he just selected them?

Mr. Todd. Yes.

Chairman Pickle. And he submitted to you the names. Did you
pay him so much?

Mr. Todd. There was a finder's fee.

Chairman Pickle. In turn, did you pay the people who got the
return back? Did you charge them?

Mr. Todd. Well, when the refund check was prepared, the check
was payable to that individual.

Chairman Pickle. Yes.

Mr. Todd. So the check was given to them and they would cash
the check and bring my portion

Chairman Pickle. And what was your portion?

Mr. Todd. Half of it.

Chairman Pickle. Mr. Becht, was yours approximately the same
thing?

Mr. Becht. No. I charged by what forms I used and the average
fee for a Federal return was $50. What forms I used was used to
base the fees on.

Chairman Pickle. You did not make them split the check?

Mr. Becht. I did not take any part of the refund. I charged a
percentage. 1 charged a finder's fee of $10 to bring in a new client,
although that became a headache to keep track of

Chairman PiCKLE. Did the people that gave you the names, did
they know this was going to be a fraudulent claim?

Mr. Todd. Yes.

Chairman Pickle. They would have to be told if they were get-
ting money for nothing?

Mr. Todd. Yes.

Chairman PiCKLE. So all those people in one way or another par-
ticipated in the fraud? That has to be generally understood.

Now, I am going to yield to Mr. Houghton, but Mr. Todd, you
said that you would have them fill out a SS— 4; is that correct?
What is the Form SS-4?

Mr. Todd. The SS-4 is a form that is an application for employer
identification number.

Chairman PiCKLE. That is all that is required, you said easy to
obtain and you could get approval within 5 minutes because of the
Government regulations on the Paper Reduction Act?

Mr. Todd. Yes.

Chairman PiCKLK. In 5 minutes you could get clearance on it?

Mr. Todd. Yes.

Chairman Pickle. Mr. Houghton.

Mr. Houghton. Thank you very much. Thank you, gentlemen,
for being here. I appreciate your being willing to come here.

As far as I am concerned there are two issues. How big is the
problem of tax fraud and what do we do to stop it? Mr. Todd, I
would like to ask you the first question, how big is it? Let me give
you numbers.

Last year, to the best of my knowledge, the IRS detected about
60 plus thousand individuals who filed fraudulent returns and that
amounted to $115 million. Although you can't necessarily relate to
those figures, how big is this thing? Is it bigger than we think it
is?

Mr. Todd. I think it is, yes.

Mr. Houghton. Can you break that down a little bit?

Mr. Todd. I think that the IRS is probably detecting maybe 25
percent of the fraud taking place with electronic filing.

Mr. Houghton. Are there particular areas that the IRS should
go to look at, people similar to you, or are there other means for
fraud?

Mr. Todd. Well, I think a primary way for them to begin to get
to the bottom of the problem is to introduce new concepts. Looking
over the material, it mentioned the use of tiger teams, which is
composed of IRS experts who would develop possible fraud schemes
and test them with the IRS to see if they were detected by what-
ever check system that they have.

I think that this type of team would be a good way for them to
approach it. However, I believe that if they were to use individuals
who had experience in actually doing these types of schemes to as-
sist them or work along with them, it would help them to

Mr. Houghton. So you say 25 percent. That is just out of your
mind. It could be 10, it could be 50, is that right; or you just feel
they are only getting a small portion?

Mr. Todd. I feel that we are only getting a small portion.

Mr. Houghton. Mr. Becht, everything we do in a democracy is
based upon trust.

Mr. Becht. Yes.

Mr. Houghton. You mentioned the fact that if people knew that
they would be criminally prosecuted, then this would eliminate the
tax refund fraud. Do you really believe that?

Mr. Becht. If they know that they will be deterred up front and
they know

Mr. Houghton. Didn't you know that you would be

Mr. Becht. Criminally prosecuted, no.

Mr. Houghton. You thought this was a good way of doing busi-
ness?

Mr. Becht. A small percentage of my returns had been audited
through the IRS. I felt that was a formal course of doing business.

Mr. Houghton. I assume that when you fudge a return, that
goes all the way back to Al Capone; it is obvious you will get in
trouble.

Mr. Becht. Yes, you should.

Mr. Houghton. So it is not only- the fact that they know, but
there is evidence of people being incarcerated; is that right?

Mr. Becht. Yes. The idea would be for tax preparers, if they
could oversee them better. I am not an enrolled tax preparer with
the IRS. I can go ahead and sign someone's return. Anyone in this
room could sign another person's tax return as information sup-
plied to them to the best of their knowledge and sign a return as
a preparer.

Mr. Houghton. Thank you, Mr. Chairman.

Chairman Pickle. Mr. Jefferson.

Mr. Jefferson. Thank you, Mr. Chairman. Mr. Todd or Mr.
Becht — Mr. Becht said he didn't think he was going to be detected.
Did you have any fear of detection, Mr. Todd?

Mr. Todd. No, I didn't.

Mr. Jefferson. Why is that?

Mr. Todd. I don't think that the IRS detected the system. I be-
lieve that it was — they were tipped off by a confidential informant.
I believe that if they never would have gotten the confidential in-
formants or anyone to — if they hadn't been tipped off, I don't be-
lieve that it would have been detected.

Mr. Jefferson. It wouldn't have been caught by the system it-
self?

Mr. Todd. Yes.

Mr. Jefferson. Someone from the outside tipped them ofF?

Mr. Todd. Yes.

Mr. Jefferson. I suppose when you got involved with this you
operated on the assumption that you wouldn't be detected so it was
a good enterprise, as far as you were concerned, to make money.

How much money did you make in this enterprise?

Mr. Todd. Pursuant to the plea agreement, $511,000.

Mr. Jefferson. $511,000.

Mr. Todd. Yes.

Mr. Jefferson. Over what period of time?

Mr. Todd. Over a period of 2 years.

Mr. Jef'FERSON. Were you ever audited on these returns? Did you
ever have to explain to the Service what was happening with any
of these returns?

Mr. Todd. No.

Mr. Jefferson. You never did. So it is possible that there are
people out there now who are doing exactly what you were doing
and as far as you know they operate without detection because the
system doesn't pick them up?

Mr. Todd. Yes.

Mr. Jefferson. I think Mr. Houghton asked you this, but in
your particular case, when you were deaHng with this electronic fil-
ing, what could the IRS have done to detect what you were doing
earlier?

Mr. Todd. I don't know what they could have done to detect it
up front. One small suggestion, perhaps, would be to put more
stringent requirements on authorizing the employer identification
numbers without making it possible for those numbers to be ob-
tained within 5 minutes over the telephone. That is one step.

Mr. Jefferson. It was necessary to have this fraudulent em-
ployer in order for the scheme to work. That was an essential part
of the scheme, right?

Mr. Todd. Yes.

Mr. Jefferson. How many different employer ID numbers did
you have to use to make this thing work over 2 years?

Mr. Todd. Well, it is hard to say. You can do this type of thing
with 10 employer ID numbers or you can do it with 50 employer
ID numbers. It would depend on how comfortable a person felt or
how safe he wanted to be.

In other words, what I am saying, if an individual doing some-
thing like this, if he felt that maybe an employer identification
number with more than 20 employees would give a red flag, then
he might cut it off at that point and get a new employer ID number
to run — to do other people under that particular employer.

Mr. Jefferson. So you would incorporate these entities or were
they corporations or partnerships or something else?

Mr. Todd. Combinations of proprietorships, partnerships and
corporations.

Mr. Jef'FERSON. And you filed income tax returns for these enti-
ties as well to make this thing operate?

Mr. Todd. Well, no.

Mr. Jefferson. You did not?

Mr. Todd. These companies did not physically exist. They had no
physical location. These companies that were used in the employer
section were purely fictitious. However, the employer identification
number was a real number that can be used in the electronic sys-
tem of the Internal Revenue Service.

Mr. Jefferson. I understand that. I guess my question is, is
there an employer identification number which is real, but which
exists for a fictitious taxpayer or tax-paying entity.

Mr. Todd. Yes. /

Mr. Jefferson. This tax-paying entity, however, did not file a
return itself. You did not file a return for it?

Mr. Todd. Correct.

Mr. Jefferson. You simply filed a W-2 form for an employee of
that company?

Mr. Todd. Yes.

Mr. Jefferson. The system doesn't pick up the fact that the em-
ployer never filed a tax return?

Mr. Todd. Well, when an employer identification number is ob-
tained in that method over the telephone, if an application SS-4
form is not received within 10 to 14 days, I believe, then the em-
ployer identification number will go off the system. So, in other

words, the employer ID number would be good for at least 10 days
and if it went off the system after that, then I don't think there
is any method to prompt IRS to even look for an income tax return
from that employer.

Mr. Jefferson. Did you ever use some real employer numbers?

Mr. Todd. Occasionally, yes.

Mr. Jefferson. But your primary practice was to use fictitious
employer numbers?

Mr. Todd. Yes.

Mr. Jefferson. One other question, Mr. Chairman. Is there a
network of folks who talk about this sort of thing — did you work
with anybody else, talk to anybody else about developing these
schemes? Is there some kind of a regular way that this gets devel-
oped or was it something of your own creation?

Mr. Todd. I didn't network with anyone or talk about developing
this with anyone. It is just an idea that came up.

Mr. Jefferson. I don't have any other questions, Mr. Chairman.

Chairman Pickle. Thank you, Mr. Jefferson. It came up — what
motivated you to get into this thing? Was it easy money? Are oth-
ers out there doing the same thing?

Mr. Todd. I saw an opportunity, I saw it as — I saw an opening
and I tried something and it worked. But there was no — nobody
else who I had observed doing it where I got an idea from.

Chairman Pickle. You got involved in this and I assume you
have examined it and said it was easy and I want to go after it.
Are people in the accounting field generally saying this is an easy
way to get quick money? Do they talk about it?

Mr. Todd. Not to my knowledge. I have never heard anyone talk
about it.

Chairman Pickle. Mr. Hancock.

Mr. Hancock. Thank you, Mr. Chairman.

You indicated in previous testimony that you had realized about
$511,000 over a 2-year period. I am assuming that when these
checks came back that your clients brought you cash money; is that
correct?

Mr. Todd. That is correct.

Mr. Hancock. In other words, you didn't file any type of an in-
come tax return?

Mr. Todd. I didn't.

Mr. Hancock. You are serving time for fraud for the scheme or
for failure to file?

Mr. Todd. Could you ask your previous question? You said I
didn't file an income tax return. I didn't quite understand that.

Mr. Hancock. You realized $511,000. Did you file an income tax
return on that $511,000?

Mr. Todd. No, I didn't.

Mr. Hancock. So my question is, are you incarcerated now as a
result of the fraud under the scheme that you put together or are
you serving time for failure to file?

Mr. Todd. No. I am serving time as a result of the scheme.

Mr. Hancock. You have never been charged with failure to file
an income tax return?

Mr. Todd. No, I haven't.

Mr. Hancock. There are all kinds of billboard type schemes now
on the computers that people can get into — for instance, credit card
fraud, telephone usage, long distance telephone calls. Is there any
possibility of any type — or is there a possibility that similar type
things are being billboarded now through computer networks?
Have you heard of anything going on like that?

Mr. Todd. I have never heard of anything like that going on, but
I believe that it is very possible that it can exist.

Mr. Hancock. It wouldn't be very difficult to do?

Mr. Todd. No.

Mr. Hancock. If somebody would attempt to pattern themselves
after you, but say they are not quite as entrepreneurial as you
were in the amount of money and only decided to pick up an extra
$25,000 a year, it would be extremely difficult to detect that?

Mr. Todd. Yes.

Mr. Hancock. In other words, if there were a lot of people out
there that said I only want to pick up extra money, not get rich,
pick up $10,000 or $15,000, just file half a dozen fraudulent tax re-
turns. But you have to get a number to file an electronic return;
isn't that correct?

Mr. Todd. To be a return originator, yes. In other words, to offer
that service to other individuals, then you have to have an elec-
tronic filer identification number.

Mr. Hancock. How do you go about getting that number?

Mr. Todd. You apply for it through filling out, completing an ap-
plication to the Internal Revenue Service and passing the suit-
ability check.

Mr. Hancock. In other words, they are supposed to investigate
what you put on there?

Mr. Todd. Yes.

Mr. Hancock. Is there any bonding requirement?

Mr. Todd. No, there isn't.

Mr. Hancock. What would happen if when you filled out the re-
turn you were required to put up a $100,000 bond, what would
happen?

Mr. Todd. If you were required to pay $100,000

Mr. Hancock. To buy, say, a $10,000 bond similar to what you
have to buy if you become a notary public. Just to get a notary pub-
lic in most States, you have to buy or post a $10,000 bond.

Mr. Todd. To get the electronic filer number?

Mr. Hancock. Yes.

Mr. Todd. That might help a little. It might eliminate people
who are not in business, who just saw an opportunity to get into
this type of scheme to earn money. I think it would eliminate
those.

Mr. Hancock. When you first started in this scheme, would you
have been in a position to have bought a $50,000 bond through
some insurance bonding company? I don't know what your financial
background is, but if in fact you had made an application for, say,
a $25,000 bond would you have been able to obtain that bond, do
you think?

Mr. Todd. I would have given serious consideration to obtaining
it.

Mr. Hancock. You think you would have qualified to be able to
get the bonds?

Mr. Todd. Yes.

Mr. Hancock. Would you say there is a lot of people that might
consider doing what you were doing that might be unable to get a
bond?

Mr. Todd. It is two sides to it. If a person was, an individual was
in business, in the tax preparation business, he would probably
spend the money necessary to do what he had to do to make
money.

On the other hand, an individual not in business, but just consid-
ering getting into the scheme, he might not make that investment.

Mr. Hancock. Mr. Becht, I understand that you completed about
4,000 returns?

Mr. Becht. Yes, over 4,000.

Mr. Hancock. You were just charging people $50 to complete a
return?

Mr. Becht. That is an average based on the forms that I used,
yes.

Mr. Hancock. You put the forms together

Mr. Becht. Yes.

Mr. Hancock. And added and subtracted so people would get the
refunds they said they might want?

Mr. Becht. Yes.

Mr. Hancock. I understand that after you were detected, they
investigated and checked 472 returns, you said 472 and IRS said
475?

Mr. Becht. They had 33 returns listed in the charges that I was
charged with and as a relevant conduct, they also had 432 returns
that they sampled, audited, of which 439 of those additional to the
33 listed in the charges also had a tax deficiency of over $700,000.

In addition to the first three listed in the charges, that adds up
to over $750,000 charges of tax deficiency.

Mr. Hancock. What happened to the other 90 percent?

Mr. Becht. They said that virtually all of my returns had re-
funds. In fact, the percentage they gave was 98 percent.

Mr. Hancock. Would you say that virtually all were misrepre-
sentations, that they were fraudulent?

Mr. Becht. Virtually, all of them — in the plea agreement, which
you have a copy of, that virtually all, 98 percent had refunds. They
did not go on to say that all were fraudulent and all were not
fraudulent, but there was a good percentage as sampled by the 442
that they picked up.

Mr. Hancock. What percentage would you say of the total were
actually

Mr. Becht. Fraudulent. There is a good number.

Mr. Hancock. Give me a figure; 75 percent?

Mr. Becht. Not that many.

Mr. Hancock. Fifty percent?

Mr. Becht. I would go with half.

Mr. Hancock. I understand that if I sign the return that I am
the one that is in trouble if it is fraudulent, not necessarily the per-
son who prepares it. Do you know what happened to the ones that

they didn't investigate? You say there is $711,000. Do you know
whether any action was taken on that?

Mr. Becht. I believe that because of what I did, I created a tax
burden for them. I beHeve that they had to then pay tax back that
they owed.

Mr. Hancock. The ones that they came back and audited?

Mr. Becht. Yes.

Mr. Hancock. But you don't know whether they audited all of
them or part of them or 20 percent

Mr. Becht. As of June 1992, they had concluded their investiga-
tion and of those sampled, those were the numbers that were given
to me. I don't know what they have done since or if they have au-
dited more than that, but all of my clients did receive refunds, with
the exception of a few; but like I say, I did over 4,000 returns and
I also noted — in a question earlier you asked Mr. Todd what per-
centage do you think they were able to detect, and just based on
the returns that one preparer did, me, based on the number of re-
turns that I did and looking at the figures that were listed for 1992
and 1993, in 17 — I believe there is a figure issued of 12.3 million
of electronic returns that were submitted, and of those 25,000 were
detected as fraudulent.

When you do the math on that, that is less than 0.2 percent. In
other words, 2 out of 1,000 returns that were submitted electroni-
cally were detected as fraudulent. To me that is extremely small.

Mr. Hancock. That is true.

Chairman Pickle. We will come back. I want to recognize other
members.

Mr. Brewster.

Mr. Brewster. Thank you, Mr. Chairman.

Mr. Becht, did your clients themselves know that you were in-
flating things to make a fraudulent return?

Mr. Becht. Some did, some did not.

Mr. Brewster. So some of your clients didn't know that the re-
turns were fraudulent but only thought that you were legally able
to get them back more money than another preparer could?

Mr. Becht. Yes. That is why they came to me. They came
through word of mouth because they knew I was doing this kind
of work, getting back the refund, and many did not have knowledge
of the tax laws so they relied on my expertise to be able to get the
best refund that they could get.

Mr. Brewster. Your main advertising, then, was that you had
a very satisfied customer because he felt he was legitimately get-
ting back more than another preparer would have gotten for him,
so he told his friends to come to you?

Mr. Becht. That is right.

Mr. Brewster. Some also did know it was fraudulent and par-
ticipated in the program?

Mr. Becht. As well as myself, they wanted to have more. As one
year got to the next year and I had done them previously, they
would say can you get me back as much as I got last year or can
you do better than that? There was pressure there, as well, from
the clients, but it is mostly my fault and I take the blame for doing
something that I should not have done.

Mr. Brewster. You operated a pretty cheap advertising scheme,
didn't you?

Mr. Becht. Yes.

Mr. Brewster. You only operated with paper products; is that
right?

Mr. Becht. Yes.

Mr. Brewster. You did nothing electronically?

Mr. Becht. No. But those schemes done electronically are easier
to do than paper. With respect to SS-4s and sham companies set
up, there is a problem there.

Mr. Brewster. Mr. Todd, how long were you involved in prepar-
ing electronic claims before you decided to see if you could do the
fraudulent claims, or did you go into that to start with?

Mr. Todd. I was preparing them electronically for maybe one
month before I decided to try it.

Mr. Brewster. Then after you tried and saw that you got by
with the first one or two, then more followed?

Mr. Todd. Yes.

Mr. Brewster. And you were operating principally in Atlanta to
start with; is that correct?

Mr. Todd. That is correct.

Mr. Brewster. You feel that you were detected not by something
the IRS did, but from a tip by a confidential informant?

Mr. Todd. That is correct.

Mr. Brewster. After you were detected in Atlanta, what did you
do then; did you cease and desist?

Mr. Todd. No, I didn't. In January — the IRS did a search and
seizure, put my business out of operation on August 16, 1991. In
January 1992, I traveled to the city of Baltimore and employed the
services of an ERO to transmit by electronic transmission income
tax returns prepared on people who were recruited similar to the
way they were recruited in Atlanta, Ga.

Mr. Brewster. You were using an ERO in Atlanta as well; right?

Mr. Todd. No, I was an ERO in Atlanta.

Mr. Brewster. But in Baltimore you utilized someone else that
was an ERO?

Mr. Todd. Yes.

Mr. Brewster. You were in Baltimore how long?

Mr. Todd. Off and on going back and forth 6 to 8 weeks.

Mr. Brewster. Then somebody tipped the IRS to the fact that
you were in Baltimore and filing fraudulent claims so you moved
to Cincinnati from there?

Mr. Todd. I moved to Cincinnati.

Mr. Brewster. Was there a reason for going to Cincinnati or did
you just decide you hked the climate there better?

Mr. Todd. I just decided to move to an area outside of Baltimore.

Mr. Brewster. How did you operate in Cincinnati?

Mr. Todd. In Cincinnati I employed the services of another elec-
tronic return originator to transmit the returns electronically for
me.

Mr. Brewster. Did they know what you were doing, that it was
fraudulent?

Mr. Todd. No, they didn't.

Mr. Brewster. In either case, in Baltimore or Cincinnati?

Mr. Todd. Not in either case, they didn't know.

Mr. Brewster. The refunds, did you vary who they were sent
to — I take it you had a person, that your finder's fee person found
a legitimate person that you filed the claim for and when the re-
fund came back they were to give you half the money.

Did you have any of them not give you your half?

Mr. Todd. When I would employ an ERO it was with the under-
standing that I was new in town and I prepared income tax re-
turns, but I didn't have a way to transmit them electronically, and
as a result of that I was losing business to H&R Block and I need-
ed a way to offer customers the rapid refunds.

Mr. Brewster. The rapid refund check though; did it go to the
customer?

Mr. Todd. No; it came to me because of the agreement that I had
with the ERO.

Mr. Brewster. The next thing — did you utilize the RAL system
as far as the money was concerned?

Mr. Todd. Yes. The refund anticipation loan, yes. That makes it
possible for the check to be received within 24 to 48 hours.

Mr. Brewster. I happen to believe the RAL system is a legiti-
mate business and very useful for a lot of Americans. In your par-
ticular case, were you going in yourself and getting the refund an-
ticipation loan or were you utilizing your person that you filed the
claim on?

Mr. Todd. In Atlanta, I had an agreement with Beneficial Bank
through my company, and the checks were printed for my office
after being authorized by the IRS and Beneficial Bank.

Mr. Brewster. Thank you.

Chairman PiCKLE. Thank you.

Now, the Chair recognizes Mr. Lewis, and I hope we can keep
our questions limited. We have the Commissioner of the Internal
Revenue Service here and the GAO and I want to get to them.

Mr. Lewis.

Mr. Lewis. Thank you very much, Mr. Chairman. Mr. Chairman,
I am sorry that I was late arriving due to another meeting.

Mr. Todd, could you tell me where your business was located in
Atlanta?

Mr. Todd. On Forsythe Street.

Mr. Lewis. What is the address?

Mr. Todd. 157 Forsythe.

Mr. Lewis. That is on the corner of what street — what is the
nearest corner?

Mr. Todd. I can't think of the name of the street right now at
that intersection — it is opposite the end of the Martin Luther King
train station.

Mr. Lewis. So you had in Atlanta, at 157 Forsythe Street, you
had a ready available audience of low-income people because of the
transportation site?

Mr. Todd. True, yes.

Mr. Lewis. And you recruited people from the public housing
projects, Bowen Homes and Martin Street Plaza and Techwood-
Clark, several public housing projects?

Mr. Todd. Yes.

Mr. Lewis. What about Perry Homes?

Mr. Todd. And Periy Homes, too.

Mr. Lewis. So you really preyed on low-income and poor people
in Atlanta?

Mr. Todd. Well, I wouldn't say preyed. The people were selected
because they easily fit the criteria in such a way that the refund
check would not be intercepted by the IRS.

Mr. Lewis. Do you know what happened to the people who gave
you their Social Security number, their ID number — what hap-
pened to these people? Did the IRS bring charges against them?

Mr. Todd. No. None of those people were charged.

Mr. Lewis. Did the IRS, to the best of your knowledge, to the
best of your information and knowledge, ever retrieve any of the
money?

Mr. Todd. Not to the best of my knowledge. I am not aware if
they did or not.

Mr. Lewis. What do you plan to do — you are now being detained,
right?

Mr. Todd. Yes.

Mr. Lewis. You are going to be released soon?

Mr. Todd. Yes. As I stated earlier, I was originally supposed to
be released on February 3, which was last week, but the halfway
houses were overcrowded, so I will be released April 4.

Mr. Lewis. You plan to go back to Atlanta?

Mr. Todd. Yes.

Mr. Lewis. Do you plan to open another business on Forsythe
Street?

Mr. Todd. No.

Mr. Lewis. What type of business do you plan to go into?

Mr. Todd. I am uncertain what type of business I will be in.
However, I would welcome the opportunity to work with the tiger
team that the IRS is in the process of developing to develop pos-
sible fraud schemes and help detect them.

Mr. Lewis. So you are going to become a consultant for the IRS —
are you going to be paid by the IRS, too, as a highly paid consult-
ant?

Mr. Todd. That is what I would like to do, yes.

Mr. Lewis. Thank you, Mr. Chairman.

Chairman Pickle. Mr. Herger.

Mr. Herger. Thank you, Mr. Chairman.

Mr. Becht, how did the IRS discover

Mr. Becht. There was an undercover agent that came to the of-
fice in the summer of 1990 and I did a tax return, two tax returns
for this person. One was an 1989 return and one was an 1988
amended return. He came in with two W-2s which were fake. That
was a set-up operation by the IRS and I overstated and fabricated
Schedule A altogether to get him to receive a refund. In fact, if I
had not done anything, if he had filed a short form, he would have
had to pay back $184, I believe. It was set up that way.

What I did was I set up deductions and that way he was able
to receive a refund. That led to the search and seizure then in Sep-
tember 1990.

Mr. Herger. Thank you, Mr. Becht.

Mr. Todd, if you were doing this over again, what would you
have done differently? You felt there were, I believe, informers; is
that how you feel you were caught?

Mr. Todd. Yes.

Mr. Herger. Is there anything you would have done differently?
Is there anything we should be aware of that you might

Mr. Todd. In some cases

Mr. Herger. Are there some suggestions you have for us on how
we might prevent this from happening again?

Mr. Todd. Yes, that would be — one ready suggestion that I would
recommend is to have — to eliminate a person being able to obtain
an employer identification number within 5 minutes over the tele-
phone.

Mr. Herger. Within 5 minutes over the telephone?

Mr. Todd. Yes.

Mr. Herger. Thank you.

Chairman Pickle. Mr. Hancock, one additional question.

Mr. Hancock. Since I get just one, I have to pick the most im-
portant one.

Mr. Becht, you went through a whole litany of various forms that
you used, you falsified, and what have you.

Mr. Becht. Yes.

Mr. Hancock. Would you state that if in fact, and I know better
than to throw this word out, that if the Income Tax Code was sim-
plified, that it would go a long ways toward preventing people from
doing what you were able to do? If we could get it down to where
the average Ph.D. could understand the Income Tax Code, do you
think that would help us in our problem of collecting the revenue?

Mr. Becht. Yes. Definitely.

Mr. Hancock. Thank you. I am really glad that the Commis-
sioner was here. Thank you.

Chairman Pickle. Thank you. I want to thank both you wit-
nesses again. We may be back in touch with you. But we appre-
ciate your testimony and we are not happy about what we have
heard because it appears that it is very easy to file and get these
quick refunds.

I am not going to go further, but we do appreciate your testimony
and thank you for attending.

Mr. Becht. Thank you, Mr. Chairman.

Chairman PiCKLE. Now, we will have the next panel please come
forward. We just had a vote called. I am going to ask the next
panel to take their place at the witness table, Ms. Richardson, and
the GAO people and we will stand in recess and go vote and ask
the members to come back immediately please.

[Recess.]

Chairman PiCKLE. The subcommittee will come to order.

Our next panel consists of Hon. Margaret Milner Richardson,
Commissioner of the IRS, accompanied by Michael Dolan, Deputy
Commissioner, and Ted Brown, who is the Refund Fraud Execu-
tive.

We also have Jennie S. Stathis, Director of Tax Policy for GAO
and David Attianese, who is the Assistant Director of Tax Policy,
GAO. I am going to, in accordance with our procedure, give the
oath to all of you.

[Witnesses sworn.]

Chairman Pickle. The record should show you all indicated in
the affirmative.

I want to proceed because I know we are running at a slower
pace than we want. We have valuable testimony to be heard from
Ms. Richardson and from the GAO.

Ms. Richardson.

TESTIMONY OF HON. MARGARET MILNER RICHARDSON, COM-
MISSIONER, INTERNAL REVENUE SERVICE, ACCOMPANIED
BY MICHAEL DOLAN, DEPUTY COMMISSIONER; AND TED F.
BROWN, REFUND FRAUD EXECUTIVE (FORMERLY, ASSIST-
ANT REGIONAL COMMISSIONER, CRIMINAL INVESTIGA-
TIONS, CENTRAL REGION)

Ms. Richardson. Mr. Chairman and distinguished members of
the subcommittee, as you know, Mike Dolan, the deputy commis-
sioner, is here with me today, also Ted Brown our refund fraud ex-
ecutive, formerly the assistant regional commissioner of criminal
investigation in our Central Region and Gary Bell, our chief inspec-
tor.

We appreciate the opportunity to be here today to discuss the
IRS efforts to detect and prevent fraudulent refund claims. The
IRS is committed to detecting and preventing attempts to under-
mine our tax system of voluntary compliance by those who are un-
willing to comply with the tax laws. Our goal is to maintain a bal-
anced enforcement program that ensures compliance among all
groups of taxpayers.

Today, we would like to share with you our current activities and
long-term strategies for addressing tax refund fraud — one element
of tax fraud. This is a very timely topic, as you noted earlier, since
the 1994 filing season has just gotten underway.

Even though we are only 6 weeks into the filing season and have
processed 6.9 million personal income tax returns, we have already
detected approximately 200 schemes involving approximately 3,000
attempts to file fraudulent claims on returns. I would like to assure
the subcommittee that we are aggressively pursuing these cases.

We have already suspended several unscrupulous return prepar-
ers from the electronic system. We have initiated numerous crimi-
nal investigations, and we have executed search warrants to obtain
evidence. While it is early to state any trends that are developing,
we have confirmed that the fraud artists are continuing to design
schemes to bypass new "filters" added for this year.

By way of background, Mr. Chairman, for a number of years the
IRS has addressed tax refund fraud through its Questionable Re-
fund Program, which began formally in 1977. The program was
conducted in each of the 10 service centers where teams of trained
personnel reviewed pre-refund tax returns which had been selected
manually or based on computer criteria.

Generally, these claims involved individuals who tried to file
more than one return by using another person's Social Security
number or by simply creating a Social Security number and other
fictitious supporting documents. In response to a number of factors
and emerging trends, we recognize the need to refocus our efforts
to better prevent fraud and detect fraud.

Our efforts from 1990 through 1993 resulted in significantly
more fraud being identified and stopped. Although we are still find-
ing the "traditional" and I put that in quotes, refund fraud
schemes, a number of new schemes have also been identified.

Many of those involve perpetrators who set up pyramid schemes
whereby they recruit individuals to file false claims. I think you
have heard about some here today.

There are also a significant number of schemes involving a few
unscrupulous return preparers and electronic return originators,
the EROs discussed earlier, who are responsible for filing many
false claims. Based on our internal reviews assessing the vulner-
ability of our systems — and we have, as you know, reported
through the FMFIA process as a material weakness in 1992 and
1993 to Congress — and based on analysis by GAO at the behest of
this subcommittee, we have designed a new multifunctional ap-
proach to control refund fraud.

In designing this approach, we recognize the need to enhance our
processing system safeguards for both paper and electronically filed
returns. At the same time, we have sought to balance our fraud
prevention efforts with our overall responsibilities to process re-
turns, payments and refunds in a timely and efficient manner.

Our fraud reduction strategy encompasses the understanding of
fraud as well as prevention, detection and enforcement. Before de-
tailing that strategy, though, I would like to talk briefly about the
extent of refund fraud.

In any fraud control situation, the statistics most readily avail-
able to management have limited value because they are taken
from existing fraud detection operations and obviously do not in-
clude undetected fraud. Although the level of detected fraud has in-
creased, it is uncertain how much is attributable to increased fraud
attempts and how much to better detection capabilities.

Without more sophisticated forms of analysis, which are difficult
and expensive to do with our current systems, our efforts to meas-
ure overall fraud lack some precision. Our current statistical indi-
cators such as the volume of fraudulent claims detected, the cor-
responding dollar value, and the volume of fraudulent refunds
stopped, assist in determining the gross nature of the problem.
However, as our expertise increases, we also know there are a vari-
ety of other hallmarks of fraud that must be evaluated as part of
our overall strategy.

Even before I was confirmed as Commissioner, based on what
was happening during last filing season, I recognized the need to
step up our efforts to detect and ultimately prevent refund fraud.
I responded in two significant ways. First, by engaging the services
of Los Alamos National Laboratory, and second, by asking Ted
Brown to spearhead a dramatically new approach to how the Serv-
ice should prevent and detect fraud.

Ted has 21 years of experience in our criminal investigation func-
tion and a strong background in fraud detection. He is a senior ex-
ecutive and I mentioned he was serving as the assistant regional
commissioner for criminal investigation when I selected him for the
job. Prior to that, he had served as an assistant district director in
New Orleans and the chief of the Criminal Investigation Division
in Dallas.

In his new role, Ted has responsibility for developing and
overseeing all of IRS' efforts to detect and prevent not only refund
fraud but also all filing fraud. Under Mr. Brown's direction, in
order to ascertain the extent of fraud, we have initiated three stud-
ies this filing season to analyze internal and external factors to de-
termine the totality of refund fraud.

The first study is already underway and it involves selecting and
reviewing a statistically valid sample of about a thousand returns
filed electronically during the month of January to help us identify
specific elements of refund fraud. IRS employees are contacting
taxpayers who file the selected returns and validating the informa-
tion on the returns.

Our second study involves selecting a moderately large statis-
tically valid sample of returns that are transmitted by EROs to de-
termine the extent of fraud perpetrated by them.

In the third phase of our study, we will be selecting and review-
ing a large statistically valid sample of refund returns that are
filed throughout the filing season. Included will be returns filed
electronically and on paper. Field work for this last effort will begin
early this spring.

The findings of these three studies, when combined with other
filing season data, should enable us to better identify the extent of
fraud, including the accuracy of return information, and to pinpoint
types of abuses or errors. Since our concerns go beyond merely
prosecuting refund fraud, we recognize that our fraud reduction
strategy must cross our traditional functional lines.

Our strategy has four components and it is going to use our new
technology and our multifunctional resources to understand fraud,
to prevent fraud, to detect fraud, and to use enforcement tools
wherever necessary. As the experts will tell you, financial fraud
control, whether in the public or the private sector, is dynamic; it
is not static. Fraud control is directed against those who think cre-
atively and adapt continuously, who relish devising complex strate-
gies and who have no single profile.

This means that a set of fraud controls which is perfectly satis-
factory today may be of no use tomorrow. Maintaining effective
fraud controls demands continuous assessment of emerging trends
and constant revision of controls.

Most of the more sophisticated financial fraud schemes are de-
vised by persons who are skilled in computer programs and tech-
niques. They assume the existence of transaction level filters and
therefore they design their fraud schemes so that the returns for
whatever the transaction is can pass through the system unchal-
lenged.

The individuals who devise such schemes seem to accept the con-
straints imposed by the system. The smarter ones test the system
from time to time to make sure they roughly understand the pa-
rameters being used and then they may increasingly generate mul-
tiple transactions and incorporate sufficient randomness or vari-
ation to minimize the risk of detection. It is very important, and
I think all of us here today should remember, that fraud claim at-
tempts are not unique to the IRS.

For instance, the banking, credit card, telephone and health in-
surance industries, as well as other Federal, State and local gov-

ernment agencies are victims of individual and organized group at-
tempts to fraudulently obtain payments or services.

Prevention is a critical element of our strategy. Although detec-
tion and prosecution are important, we have no illusion that we
can prosecute every instance of fraud. Recognizing this, we will
continue to build higher barriers to fraud so that the IRS is viewed
by criminals as an unattractive target.

Our goal is to make our system impregnable, to stop fraudulent
returns from entering it. We are instituting short and long-term
systemic changes that would prevent fraudulent returns from en-
tering our systems. Other prevention measures include an outreach
and publicity program.

For instance, at the same time we increase our publicity efforts
to educate taxpayers and practitioners about the benefits of elec-
tronic filing, we have a responsibility to make the public, including
the practitioner and ERO communities, aware of the need to com-
bat fraud. We believe that the vast majority of taxpayers, tax prac-
titioners and even EROs are interested in maintaining the integ-
rity of our tax system.

They recognize their responsibility to prepare, file or transmit
correct information to the IRS, and we appreciate their efforts in
working with us. However, we want to make it very clear that
when we identify those unscrupulous taxpayers, practitioners, and
EROs who are committing fraud, we intend to pursue criminal en-
forcement to the fullest extent.

In order to better our fraud prevention techniques, my staff and
I are in complete agreement that we must also have a very strong
detection component to our fraud reduction strategy. To that end,
we are improving our current screening and detection systems with
the use of more sophisticated and automated techniques.

I have long recognized and valued seeking expert advice to ad-
dress problems. Toward that end, I have explored seeking experts
to assist us with all of our fraud concerns. Key members of my staff
and I visited Los Alamos National Laboratory last spring to explore
how the creative use of the laboratory's artificial intelligence capa-
bility could assist us in detecting refund fraud. The laboratory's
7,500 employees have a reputation for applying world class sci-
entific and technical talent to the solution of problems of national
importance.

Their greatest strength as it applies to issues of concern to the
IRS is th® ability to assemble teams of diverse multidisciplined
technical staff to tackle all aspects of a complicated problem. Their
team is experienced in the challenge of collecting large quantities
of data, like tax returns, identifying the subset of information that
would be useful for fraud detection, and integrating this informa-
tion into existing or planned IRS systems.

Through a contract we have with Los Alamos' advanced comput-
ing lab, we are placing the resources of the world's most powerful
high performance computers to work on fraud detection with us.
The laboratory's research in nuclear weapons is widely known, but
in more recent years they have been called upon by other govern-
ment agencies and private companies to lend their technical abili-
ties to solving other important problems.

They have assisted many agencies in improving computer secu-
rity and designing software to detect anomaHes in match patterns
in large data sets. It is this, the anomaly detection and pattern
matching achieved through the use of artificial intelligence algo-
rithms, neural networks, and other advanced types of machine
learning, that we hope to take advantage of. This skill set offers
potential to assist the IRS in improving many areas, including
fraud detection, audit selection, computer security, and market seg-
mentation.

Specifically, though, we believe this assistance will improve our
ability to identify fraudulent refund claims and to reduce expensive
manual screening procedures. As we continue to identify the items
on returns that are predictive of fraud, we will move these filters
to the front of our processing system. Returns with these patterns
can then be removed from normal processing and carefully scruti-
nized. This year we are already piloting a new electronic fraud de-
tection system which will serve as a platform for the Los Alamos
Laboratory systems.

Our chief inspector, who is here with me today, also views refund
fraud as a priority and he has made it a significant piece of our
internal audit work plans. Indeed, many of the enhancements we
have installed this year have come from the excellent work of our
internal audit function.

As I mentioned, our current detection program depends upon
pre-refund review of millions of returns by manual or computer cri-
teria. Those returns having substantive indications of fraud are re-
ferred to field offices for possible criminal investigation.

Returns which do not merit criminal investigation are referred to
other functions for civil action or processing. The principal source
of returns selected for review by the QRP teams is computer runs
that apply weighted criteria against every refund return that is
processed.

The criteria are developed and refined based upon previously
identified false claim schemes as well as potential abuses that are
identified by IRS personnel. They are capable of being modified so
that data can be inserted when additional schemes or potential
abuses are identified to allow cataloguing of the total scope of
fraudulent trends.

In addition, the normal return processing routines have built in
checks and balances that assist us in the identification of suspected
fraudulent claims. All service center personnel are given fraud
awareness briefings during their training so that they can be alert
to the indicators of fraud, and throughout the returns processing
pipeline any service center employee can designate suspicious re-
turns for review by the QRP teams. With the additional staffing we
have allocated this year, we expect to review about 6 million sus-
pect returns.

A fourth component of our fraud reduction strategy involves the
use of enforcement tools such as prosecution to deter criminal vio-
lations of the tax law. Public confidence in our tax system can only
be maintained if tax refund fraud perpetrators know that they risk
going to jail when they are caught. I think we heard confirmation
of that earlier this morning.

The IRS, working with the Department of Justice and U.S. attor-
neys, will continue to actively pursue cases of criminal violations
of the tax laws with every intention of prosecuting where appro-
priate. We have been very successful in the area of criminal en-
forcement, and I have recently met with the Attorney General, the
Assistant Attorney General and head of the tax division, and the
U.S. attorneys, and we have each renewed our commitment to work
closely toward the effective prosecution of fraudulent refund cases,
both in the paper and in the electronic area.

Approximately 98 percent of our indictments involving refund
fraud result in conviction, and the average incarceration time is 17
months. But despite this success, we recognize that we cannot pros-
ecute the problem of fraud away and that we need the broader
multifunctional fraud reduction strategy.

In some situations, we have been able to combine criminal pros-
ecution with some of our other compliance initiatives. For example,
we found one return preparer in a remote county in northern Flor-
ida who was preparing fraudulent refund returns by claiming tax
credits. The traditional method of handling such a situation would
have been to audit all the preparer's clients, but in this case we
notified the unsuspecting taxpayers that they could have a poten-
tial problem with their tax returns.

We set up taxpayer assistance sites at convenient times and loca-
tions and invited the taxpayers to come up for tax assistance and
to do self-audits on their returns. Over 200 taxpayers corrected
their returns and received some tax assistance to hopefully prevent
the situation from ever happening again.

I would like to turn for a moment to our initiatives for 1994. In
continuing to reduce tax refund fraud, numerous systemic and pro-
cedural changes have been implemented for the 1994 filing season.
These include additional comparisons of IRS data to confirm the
identify of the taxpayers and the validity of their claims. However,
to disclose the specific nature of those checks here would reduce
their effectiveness in protecting our system.

Another systemic test is being performed by a cross-functional
group of special agents, questionable refund detection team mem-
bers, internal auditors and electronic filing specialists. Although re-
cently formed, the group's mission is to creatively challenge the
system by developing schemes in which they believe they can file
fraudulent returns and avoid detection. In this way, we can test
our current detection systems and devise ways to change them, if
necessary.

Without modern equipment and software, methods of applying
expert systems analysis to large databases would be very difficult.
So TSM is already having a positive effect on our fraud detection.
In the future, however, we envision that the technology we will ac-
quire under TSM will significantly improve our detection capabili-
ties.

Systems we will install this year and in the next few years will
permit us to capture and use all information contained on tax re-
turns, and this will improve our ability to perform more validity
checks and data analysis work.

New storage devices will permit us to store enough data online
that we will nave the ability to check multiple years of information
much more extensively than in the past. This storage and the in-
creased telecommunications envisioned in the National Perform-
ance Review will make it easier to match data between agencies so
we will be able to ensure that our data and that of the Social Secu-
rity Administration is timely and accurate.

Our electronic management system will offer a means for em-
ployers to provide data more quickly and more accurately, allowing
us to cross check tax return data more quickly. This should signifi-
cantly improve our ability to validate employer withholding infor-
mation, and it will make it much more difficult for anyone to falsify
W-2 information.

Mr. Chairman, we appreciate the strong support that this sub-
committee has given to our Tax Systems Modernization Program.
Your willingness has made and will make our fraud detection capa-
bility more sophisticated. But it is important that we continue the
progress already started so that we can implement the plans we
have made. To do that we would appreciate your continued support
for tax system modernization.

In conclusion, I think it is fair to say that prevention and deter-
rence are clearly the keys to refund fraud control. Prosecutions are
an important component of our strategy and we are going to con-
tinue to emphasize enforcement. Our detection and deterrence pro-
grams are working, but they need to be enhanced as we detect new
schemes.

Mr. Chairman, this concludes my prepared remarks. We appre-
ciate your offer to assist us with legislative recommendations for
preventing refund fraud and for improving enforcement. When we
have concluded the filing season, we would like to review the re-
sults of our three studies I described with you and your staff and
discuss those and possible recommendations that we might have.

My colleagues and I would now be more than happy to answer
questions that vou might have and would appreciate any sugges-
tions you have for improvement. Thank you.

Chairman PiCKLE. Thank you for your thorough testimony. We
appreciate your frankness and your plans that you have for the
agency.

[The prepared statement follows:]

STATEMENT OF MARGARET MILNER RICHARDSON
COMMISSIONER OF INTERNAL REVENUE

BEFORE THE

SUBCOMMITTEE ON OVERSIGHT
HOUSE COMMITTEE ON WAYS AND MEANS

FEBRUARY 10, 1994

Mr. Chairman and Members of the Subcommittee:

With me today are Mike Dolan, my Deputy Commissioner, and Ted Brown, our
Refund Fraud Executive, formerly the Assistant Regional Commissioner, Criminal
Investigation, Central Region.

We appreciate the opportunity to be here today to discuss the Internal Revenue
Service's (IRS) efforts to detect and prevent fraudulent refund claims. The IRS is
conmiitted to detecting and preventing attempts to undermine our tax system of
voluntary compliance by those who are unwilling to comply with the tax laws. Our goal
is to maintain a balanced enforcement program that ensures compliance among all
groups of taxpayers.

Traditionally we have accomplished this goal through a broad-based enforcement
of the tax laws, the Bank Secrecy Act and money laundering statutes by our Criminal
Investigation Division (CID), the criminal tax investigative arm of the IRS. Our special
agents are widely recognized experts in investigating financial fraud. White collar
financial crimes, such as tax fraud, bankruptcy fraud, and motor fuel excise tax crimes
are among CID's top enforcement priorities.

Today, we would like to share with you our current activities and long-term
strategies for addressing tax refund fraud - one element of tax fraud. This is a very
timely topic, since the 1994 filing season has just gotten underway. Even though we are
only six weeks into the filing season and have processed 6.9 million personal income tax
returns, we have already detected approximately 200 schemes involving approximately
3,000 attempts to file fraudulent claims on returns. I would like to assure the Committee
that we are progressively pursuing these cases. We have already suspended several
unscrupulous return preparers from the electronic system, initiated numerous criminal
investigations, and executed search warrants to obtain evidence. While it is early to state
any trends that are developmg, we have confirmed that the fraud artists are designing
schemes to bypass new "filters" added for this year.

I. INTRODUCTION

For a number of years, IRS has addressed tax refund fraud through its
Questionable Refund Program (QRP), which began formally in 1977 in response to
perceived abuses of the system. In 1977, the CID had the primary responsibility for
QRP. The program was conducted in each of the ten sendee centers, where teams of
trained personnel reviewed pre-refund tax returns which had been selected manually or
based on computer criteria. During the thirteen years 1977 to 1990, IRS identified a
relatively modest number of fraudulent refund claims per year. Generally, these claims
involved individuals who tried to file more than one return by using another person's
Social Security Number (SSN) or by simply creating SSNs and other fictitious supporting
documents. We also pursued, through our Collection Division, fraudulent refunds which
had been issued prior to detection.

In response to a number of factors and emerging trends, we began, over the last
several years, to step up our efforts to identify fraud. These increased efforts from 1990
through 1993 resulted in significantly more fraud identified and stopped by the IRS.
Although we are still finding the "traditional" refund fraud schemes, a number of new

schemes have also been identified. Many of these involve perpetrators who set up
pyramid schemes, whereby they recruit individuals to file fjilse claims. Another
significant number of schemes involves a few unscrupulous return preparers and
Electronic Return Originators (EROs) who are responsible for many false claims.

To arrest this trend, IRS reviewed its systems and designed a new multi-functional
approach to control refund fraud utilizing new technologies for fraud prevention and
detection. In designing this ^proach, we recognized the need to enhance our processing
system safeguards for returns filed on paper and electronically while, at the same time,
we are balancing our fi-aud prevention efforts with our overall responsibilities to process
returns, payments, and refunds in a timely and efficient manner.

Our fi-aud reduction strategy encompasses the understanding of fraud, as well as
prevention, detection, and enforcement. All four elements are essential for effective
fraud control. Before detailing that strategy, I want to discuss the extent of refund fraud
and provide you with some examples of actual schemes.

II. EXTENT OF FRAUD

In any fraud control situation, the statistics most readily available to management
have limited value because they are taken from existing fraud detection operations and
obviously do not include imdetected fraud. Although the level of detected fraud has
increased, it is uncertain how much is attributable to increased fraud attempts and how
much to better detection capabilities. Without more sophisticated forms of analysis,
which are difficult and expensive to do with our current systems, our efforts to measure
overall fraud will lack some precision. Our current statistical indicators, such as the
volume of fraudulent claims detected, the corresponding dollar value, and the volume of
fraudulent refunds stopped, assist in determining the gross nature of the problem;
however, as our expertise increases, we also know there are a variety of other hallmarks
of fraud that must be evaluated as part of our overall strategy.

The known statistical indicators must be cited with caution, since they can be
easily misunderstood. For example, from January 1 though October 3 1, 1993, the
number of fraudulent refund returns detected (approximately 61,000 returns) was more
than double the number detected in 1992 (25,000 returns for the whole year). The dollar
aggregate for fraudulent refunds detected during that ten month period exceeded $110
million. We are continuing to analyze the statistics along with others to further assess
the extent to which these detection figures represent a dramatic increase in the rate of
fraud attempts, an improvement in IRS detection capabilities, or a combination of both.
We do know that some of the things affecting the detection figures are: increased
staffing in the QRP; changes to the QRP reporting by including return preparer schemes
previously not included in the QRP; and added enhancements to the QRP selection
criteria. We have also begun to identify additional external factors relating to refund
fraud.

In order to enable more comprehensive analysis, we initiated three studies this
filing season to analyze internal and external factors to determine the totality of refund
fraud. Statistically valid samples, including paper and electronically filed returns from all
income levels, are being used for these studies.

The first study is already underway and involves selecting and reviewing a small,
statistically valid sample of about 1000 returns filed electronically during the month of
January. IRS employees are contacting the taxpayers who filed the selected returns and
validating the information on the returns. This project will help us identify specific
elements of refund fraud. The second study involves selecting a moderately large sionple
of returns transmitted by EROs to determine the extent of fraud perpetrated by them.
Third, we will select and review a large statistical sample of refund returns filed
throughout the filing season. This includes returns filed on paper and electronically.
Although plans are still being formulated and we would like the precise elements to

remain confidential, we do anticipate using a combination of face-to-face, telephone and
correspondence contacts. Field work for this last effort is scheduled to begin this spring.
The findings of the three studies, when combined with other filing season data, should
enable IRS to better identify the extent of fraud including the accuracy of return
information, and to pinpoint types of error or abuse. We will use this information to
plan for the FY95 filing season as well as for long term improvements.

III. FRAUDULENT SCHEMES AND INVESTIGATIONS

Fraudulent refund schemes detected by the QRP team consist of tax returns filed
that claim fraudulent refunds based on the misrepresentation of federal income taxes
withheld or refundable credits. Those jjerpetrating fraud:

4 use their own names and SSNs;

♦ use names and SSNs of unsuspecting legitimate taxpayers; or

♦ use totally fictitious names and SSNs.

Some specific examples of detected fraudulent schemes may make the issues involved
easier to understand.

A) Unscrupulous return preparers/EROs

Two owners of an income tax return preparation firm in Salinas, California,
obtained SSNs and names of area agricultural employees from their clients'
payroll records. Unknown to the agricultural workers, the two preparers
submitted over 200 tax returns claiming more than $165,000 in fraudulent refunds.
This scheme was discovered when the QRP team detected irregularities on the
returns and when the workers began filing legitimate returns of their own. The
preparers received substantial sentences of 37 and 18 months for their respective
roles in the scheme and were ordered to pay restitution.

B) Individuals wiio recruit others to file false tax returns.

Two rings operating in Jacksonville and Tampa, Florida, recruited their friends,
families and associates to file false tax returns. The scheme involved real people
using their own SSNs, but the Forms W-2 had false wage and withholding
information. The ring also used non-existent companies or claimed wages from
companies where the filers were never employed. This case was identified when
similarities among returns were detected by the QRP team. Over $400,000 in
false claims were involved, and 28 people were charged in the conspiracy to
perpetrate this refund scheme. Most have pled guilty and have received
substantial sentences.

C) Prisoner Schemes

Each year there are prisoners who attempt to defraud the tax system. For
example, an inmate in a Colorado prison contrived a refund scheme to file three
false claims for refunds totalling $20,000. The inmate prepared and submitted
Forms W-2 and tax returns after obtaining other prisoners' SSNs and names. The
other prisoners were paid a commission for allowing these returns to be filed
using their names and SSNs. The inmate received 10 more years to serve in
prison for this scheme. Through systemic checks we have regarding prisoners, IRS
was able to stop all of the refunds.

D) Use of False or Nonexistent Documentation

One of the more sophisticated schemes involved an attorney who planned for
eight months to p>erpetrate a multi-million dollar scheme to file fjdse income tax

refund claims with the help of two people. He agreed to pay a friend, who was
previously convicted of extortion, a fee of 20% of the proceeds to:

♦ obtain the names and SSNs to be placed on the false returns;
4 assist in obtaining false identification for their use;

♦ locate mail drops for mailing the refund checks; and

♦ retrieve the refund checks when they arrived.

The second person was a payroll clerk of a large company, who helped steal the
company's payroll printouts containing employee data. The conspirators
mismatched names and SSNs to create married couples and prepared joint tax
returns. Other names were used to prepare single returns. They established mail
drops along the East and West Coasts using the false identification and also
generated fictitious Forms W-2. They then mailed over 900 false returns claiming
over $8 million to three different service centers so the duplicate addresses would
not be easily detected.

However, all of their plans failed, because within a short term our QRP identified
this scheme. When the conspirators visited the mail drops to pick up refund
checks, an employee of the business providing the mail service informed them that
they were being watched.

They destroyed all of the physical evidence in their possession, including the few
refund checks that had been released by IRS. The attorney was attempting to sell
all of his assets and leave the country when our special agents arrested him. He
subsequently pled guilty to conspiracy and received a 41 month prison sentence.
His friend was sentenced to 5 years and the payroll clerk was sentenced to 1 year
in prison, followed by 1 year supervised release.

Our detection systems also have intercepted false claims which reveal the
following additional types of abuse:

Using fraudulent Schedule Cs with inflated income figures.

Using unidentified income, later determined to be welfare payments, as

earned income to qualify for an Earned Income Credit-based refund.

These fimds are included on returns as other income or wages.

Recruiting indigent, homeless individuals, as well as college and high

school students, to file fraudulent returns. Persons standing in low income

housing and welfare lines are also being recruited.

Misusing SSNs on EIC schedules by not including a SSN, writing the words

"applied for," or using a false SSN that either does not exist or belongs to

someone else.

Preparers knowingly file incorrect returns, with or without a taxpayer's

knowledge, by adding non-qualifying dependents as exemptions or

increasing deductions while diverting the refunds from the taxpayers.

Individuals acting alone and filing just one fraudulent return using many of

the methods already identified.

Qaiming large amounts of false income and withholding and claiming a

refund based on business losses.

Obtaining names and SSNs of unsuspecting taxpayers from many sources

including payroll records, church records, softball teams, and even

obituaries.

IV. FRAUD REDUCTION STRATEGY

A) Overview

Shortly after becoming Commissioner, I recognized the need to step up our efforts
to detect refund fraud. I responded by appointing Ted Brown, who is with me here

today, as our Refund Fraud Executive to spearhead our enhanced efforts. Ted has 21
years of experience in our Criminal Investigation function and a strong background in
fraud detection. He is a senior executive, who was serving as the Assistant Regional
Commissioner (CI), Central Region, when I selected him. Prior to that he was the
Assistant District Director in the New Orleans District and the Chief, CID in Dallas. In
his new role, he has the responsibility for developing and overseeing all of IRS' efforts to
enhance the detection and prevention of not only refund fraud, but also filing fraud in
general.

Since our concerns extend beyond just prosecution of refund fraud, we recognize
that our fraud reduction strategy must cross our traditional functional Unes. The strategy
is a four-component plan utilizing new technology and multifunctional resources to:

♦ understand fraud;

♦ prevent fraud;

♦ detect fraud; and

♦ use enforcement tools whenever needed.

B) Understanding Fraud

Fraud control is dynamic, not static. Fraud control is directed against those who
think creatively and adapt continuously, who relish in devising complex strategies, and
who have no single profile. This means that a set of fraud controls, which is perfectly
satisfactory today, may be of no use at all tomorrow. Maintaining effective fraud
controls demands continuous assessment of emerging trends and constant revision of
controls.

Most of the more sophisticated fraud schemes are devised by persons skilled in
computer programs and techniques. They assume the existence of transaction-level
filters, and therefore design their fraud schemes so that their returns pass through the
system unchallenged. These individuals who devise such schemes seem to accept the
constraints imposed by the system. The smarter ones test the system from time to time
to make sure they roughly understand the parameters being used, and then
they may increasingly generate multiple transactions and incorporate sufficient
randomness or variation to minimize the risk of detection.

It is very important to recognize that fraud claim attempts are not unique to the
IRS. We are all too familiar with the recent reported examples of fraudulent attempts
to obtain disaster relief in the Los Angeles earthquake area. Other examples of
attempts to defraud govenmient agencies through false claims to obtain food stamps,
Medicare/Medicaid payments, welfare assistance or procurement payments have made
headlines around the United States. Not only government agencies have been the target
of fraud artists; the banking, credit card, telephone and health insurance industries have
been victims of individual and organized group attempts to fraudulently obtain payments
or services. As govenunent agencies and private companies have moved to automate
their systems, the fraudsters have followed.

There are factors commonly found in all fraud control situations and we at the
IRS are taking steps to avoid those pitfalls. Private sector companies (credit card and
insurance companies, for example) compete with one another on the basis of quality
service, which often produces an incentive to pay customers faster than the competition.
Efforts to shorten payment cycles and to dispatch electronic payments rapidly must be
matched by corresponding safeguards to ensure adequate controls - whether a private
company or the IRS. While we too want to provide quality service that will include
prompt payment, and are moving to do so through modernizing our technology, we have
to assure improved compliance as well.

' 34

C) Prevention

Prevention is the critical element of our strategy. Although detection and
prosecution are important, we have no illusion that we can prosecute every instance of
fraud. Recognizing this, we will continue to build higher barriers to fraud ~ so that the
ERS is viewed by criminals as an unattractive target Our goal is to make our system
impregnable ~ to stop fraudulent returns from entering it.

We are instituting short-term and long-term systemic changes that would prevent
fraudulent returns from entering our systems. One such example implemented this filing
season is our elimination of the direct deposit feature on refunds issued to first time
filers. These refunds are issued in the form of a paper check. Other prevention
measures include an outreach and publicity program. For instance, at the same time we
increase our publicity efforts to educate taxpayers and practitioners about the benefits of
electronic filing, we have a responsibility to make the public ~ including the practitioner
and ERO communities ~ aware of the need to combat fraud. One example of our fraud
awareness efforts is the presentation we make at our electronic filing trade shows and
other practitioner events. During this presentation, we provide an overview of the QRP
and focus on keeping bad returns out of the system.

We continue to build on our partnership with practitioners and EROs. We
provide training to preparers and have designated Electronic Filing Coordinators in each
IRS district The vast majority of taxpayer practitioners and tax EROs are interested in
maintaining the integrity of our tax system; they recognize their responsibility to prepare,
file, or transmit correct information to the IRS. Several of the major preparers have
initiated their own fraud prevention efforts, and we appreciate their efforts in working
with us. However, when we identify those few unscrupulous practitioners and EROs
abusing the authority of their position by committing fraud, we intend to pursue crimiiud
enforcement to the full extent

D) Detection

In addition to better prevention techniques, we also have a strong detection
component in our fraud reduction strategy. We are improving our current screening and
detection systems with the use of more sophisticated and automated techniques. I
recognized this as a priority item when I became Commissioner. With key members of
my staff, I visited the Los Alamos National Laboratory in Los Alamos, New Mexico, to
see first-hand the creative use of competent artificial intelligence systems in detecting
fraud.

Los Alamos National Laboratory's 7,500 employees are ready to apply world class,
scientific and technical talent to the solution of problems of national importance. The
Laboratory's greatest strength, as it applies to the IRS' problems, is the ability to
assemble large or small teams of diverse, multi-disciplined technical staff to tackle all
aspects of a complicated problem, integrate the solution, and then deliver a final product
in a timely fashion that meets requirements. The Information Extraction and Analysis
Team is experienced in the challenge of collecting large quantities of data (like tax
returns), identifying the sub-set of information that would be useful (for fraud detection)
and integrating this information into existing or planned IRS systems. Through Los
Alamos' Advanced Computing Lab, we can place the resources of the world's most
powerful high-performance computers to work on the problem of fraud detection.

The Laboratory's research in nuclear weapons is widely known. But in more
recent years, they have been called upon by other goverrmient agencies and private
companies to lend their technical abilities to solving other important problems. They
have assisted many agencies in improving computer security and designing software to
detect anomalies and match patterns in large data sets. This anomaly detection and
pattern matching is achieved through the use of artificial intelligence algorithms, neural

networks and other advanced types of machine learning. This skill set offers potential to
assist the IRS in improving many areas including fraud detection, audit selection,
computer security and market segmentation. Specifically, we believe this assistance^will
improve our ability to identify fi-audulent refund claims and to reduce expensive manual
screening procedures. As we continue to identify the items on returns that are predictive
of fraud, we will move these "filters" to the front of our processing system. Returns with
these patterns can then be removed from normal processing and carefully scrutinized.
This year, we are already piloting a new electronic fraud detection system which will
serve as a platfonn for the Lx)s Alamos Laboratory systems.

Our Chief Inspector also views refund fraud as a priority and has made it a
significant piece of the Internal Audit work plans. Internal Audit continues to provide
assistance in enhancing our detection capabilities, as well as evaluating the efficiency and
effectiveness of our program.

As I mentioned before, our current detection program depends on a pre-refund
review of millions of returns selected by manual or computer criteria. Those returns
having substantive indications of fraud are referred to field offices for possible criminal
investigation. Returns which do not merit criminal investigation are referred to other
functions for civil action or processing.

The principal source of returns selected for review by the QRP teams is computer
runs that apply weighted criteria against every refund return that is processed. The
criteria are developed and refined yearly based upon previously identified false claim
schemes, as well as potential abuses, identified by IRS personnel. They are capable of
being modified so that data can be inserted when additional schemes or potential abuses
are identified to allow cataloguing of the total scope of fraudulent trends.

In addition, the overall processing of returns by IRS has certain built-in checks
and balances that assist us in the identification of suspected fraudulent claims. All
service center personnel, including data transcribers, are given fraud awareness briefings
during their training so they can be alert to indicators of fraud. Throughout the returns
processing pipeline, service center personnel designate suspicious returns for review by
the QRP teams. We continually challenge our system, drawing from what we observe
and learning from the most sophisticated schemes.

We use many internal as well as external sources of information in order to
identify fraudulent returns. With our present staffing levels, we are able to physically
review about 6 million suspect returns a year. Each center has a team made up of 20 to
65 members during various times of the filing season. The additional staffing that has
been allocated to the QRP teams has allowed them to review more returns and use a
more analytical approach in the detection process. The additional staffing has also
allowed for more interaction between our field agents and our QRP teams. This
interaction facilitates early detection of fraud and stops many schemes. Our Returns
Processing and Information Systems functions continue to expand their role in fraud
detection, which has contributed to the increase in detection of fraud.

E) Prosecution

A fourth component of our fraud reduction strategy involves the use of
enforcement tools, such as prosecution, to deter criminal violations of the tax law.
Public confidence in our tax system can only be maintained if tax refund fraud
perpetrators know that they risk going to jail when they are caught. The IRS, working
with the Department of Justice and the U.S. Attorneys, will continue to actively pursue
cases of criminal violations of the tax laws with every intention of prosecuting where
appropriate. We have been very successful in the area of criminal enforcement, and we
will continue to work closely with the Department of Justice and the U.S. Attorneys to
be even more effective in the prosecution of fraudulent refund cases. I have taken two
recent opportunities to commend the U.S. Attorneys for their excellent support on those

cases and solicited their continued partnership. Approximately 98% of our indictments
involving refund fraud result in conviction, and the average incarceration time is 17
months.

During recent briefings of this Subcommittee's staff, we were asked to review the
existing criminal tax statutes to determine whether they are adequate or whether there is
a need for additional legislation to address fraud. We believe that at the present time,
the existing criminal statutes are effective, but we will continue to evaluate legislative
and regulatory proposals to address the evolution of fraud.

Examples of the three basic methods of refund fraud prosecution under current
criminal statutes include:

♦ A return preparer in the Boston area was recently convicted of violating 18
use 286, conspiracy to defraud the government with respect to claims. He
received a sentence of 57 months in prison and was fined $492,828.

♦ An individual in the Dallas area was convicted of violating 18 USC 287, for
submitting false, fictitious, or fraudulent claims. He was recently sentenced
to 60 months in prison.

♦ An Arkansas return preparer was convicted of 26 USC 7206(2), aiding and
assisting in preparing or presenting fraud or false statements. He was
sentenced to 30 months in prison for preparing 1090 fraudulent returns
with the false claims totaling $1.3 million.

Despite these successful convictions, we recognize that we cannot prosecute the
problem of fraud away and that we need a broader multi-functional fraud redurtion
strategy. In some situations, we have successfully combined criminal prosecution with
other compliance initiatives. For example, in a remote county in northern Florida, there
was one return preparer for the county. This preparer was preparing fraudulent refund
returns by claiming tax credits. The traditional method of handling such a situation
would be to audit all of the preparer's clients. In this case, we notified the unsuspecting
taxpayers that they could have a potential problem with their tax returns. We set up
taxpayer assistance sites at convenient times and locations and invited the taxpayers to
come in for tax assistance and to do self-audits of their returns. Over 200 taxpayers
corrected their returns and received some tax assistance to prevent the situation from
happening again.

Although this approach is not appropriate in all cases, it worked very well in this
situation. Efforts like this, as well as many oufreach and educational efforts, are being
used throughout the country.

F) Initiatives for 1994

In a continuing effort to reduce tax refund fraud, numerous systemic and
procedural changes have been implemented for the 1994 filing season. These include
additional comparisons of IRS data to confirm the identity of the taxpayers and the
validity of their claims. However, it would not be appropriate to disclose the specific
nature of these checks here, since to do so would reduce their effectiveness in protecting
our system.

Another systemic test is being performed by a cross-functional group of special
agents, questionable refund detection team members, internal auditors, and electronic
fiUng specialists. Although recently formed, the group's mission is to creatively challenge
the system by developing schemes in which they believe they can file fraudulent returns
and avoid detection. In this way, we can test our current detection systems and devise
ways to change them if necessary.

V. LONG-TERM PROPOSED SYSTEMIC CHANGES WITH TSM

Many of the limitations on our past ability to apply sophisticated fraud detection
techniques have been caused by a lack of adequate computer resources. The increases
in access to information, and increases in computing power and capacity now being
realized as a result of Tax Systems Modernization (TSM), are critical to the
implementation of these techniques. Without modem equipment and software, methods
of applying expert systems analysis to large data bases would be very difficult. So, TSM
is already having a positive effect on our fraud detection.

In the future, however, we envision that the technology we will acquire under
TSM will significantly improve our detection capabilities. Systems we will instal' this
year and in the next few years will permit us to capture and use all information
contained on tax returns. TTiis will improve our ability to perform more validity checks
and data analysis work. New storage devices will permit us to store enough data on-Hne
that we will have the ability to check multiple years of information much more
extensively than in the past. This storage and the increased telecommunications
envisioned in the National Performance Review will make it easier to match data
between agencies, so we will be able to ensure that our data, and that of the Social
Security Administration, is timely and correct. Our Electronic Management System will
offer a means for employers to provide data more quickly and more accurately, allowing
us to cross-check tax return data as a tax return is processed instead of after it is
processed. This should significantly improve our ability to validate employer withholding
information and will make it much more difficult for anyone to falsify W-2 information.

Mr. Chairman, we appreciate the strong support of this Subcommittee for our Tax
Systems Modernization program. Your willingness to support this capital investment in
our tax system has made our fraud detection capability more sophisticated and promises
to significantly improve our future capabilities. But, it is important that we continue the
progress already started so that we can implement the plans we have made. To do that
we will need your continued support for TSM.

VI. CONCLUSION

In conclusion, prevention and deterrence are clearly the keys to refund fraud
control. Prosecutions are an important component of our strategy, and the IRS will
continue to emphasize enforcement. Our detection and deterrence programs are
working but need to be enhanced as we detect new schemes. All of our partners in tax
administration need to recognize that fraud reduction is a joint responsibility. We are
pleased that the practitioner community has answered the call for assistance and
recognized their responsibility to assist us in detecting fraud.

Mr. Chairman, this concludes my prepared remarks. We would appreciate any
suggestions for improvements that you or your colleagues may wish to offer. My
colleagues and I would be happy to answer any questions you or other Subcommittee
members may have. Mr. Brown will also be available to follow up with your
Subcommittee as subsequent filing season data relating to refund fraud becomes
available.

Chairman PiCKLE. Now, I am going to go to Ms. Stathis for her
testimony. Will you proceed?

TESTIMONY OF JENNIE S. STATHIS, DIRECTOR, TAX POLICY
AND ADMINISTRATION ISSUES, GENERAL GOVERNMENT DI-
VISION, ACCOMPANIED BY DAVID J. ATTIANESE, ASSISTANT
DIRECTOR, TAX POLICY AND ADMINISTRATION ISSUES, GEN-
ERAL GOVERNMENT DIVISION

Ms. Stathis. Thank you, Mr. Chairman. We are pleased to be
here today to participate in your hearing. My statement focuses on
recommendations that we have made with respect to electronic fil-
ing fraud.

Electronic filing fraud, while an important issue today, will be-
come even more critical as IRS moves toward a goal of 80 million
electronic returns by the year 2001. We wholeheartedly support the
need to convert IRS in a paper environment to a more modern elec-
tronic one, but the conversion must be accompanied by adequate
controls against fi^aud.

In the past, IRS has often appeared more interested in expand-
ing electronic filing than in insuring that it fully understood and
adequately addressed the risks. As a result, IRS has been in a re-
active posture, adding controls every year in the hope of effectively
dealing with a problem that it did not fully understand.

Thus far, the number of electronic returns identified as fraudu-
lent is relatively small. The high rate of growth in that number is
of concern, however, because it could reflect an increase in fraudu-
lent activity rather than the result of increased monitoring. More
troubling is the uncertainty as to how much fraud might be going
undetected.

In 1993, about 12 million returns were filed electronically, 13
percent more than in 1992. By comparison, IRS identified 105 per-
cent more fraudulent electronic returns.

The risk of electronic filing fraud could be reduced through
changes in the system's design. The system is not fully electronic.
Taxpayers can file tax data electronically, but must still send in
paper documents with their handwritten signatures. Those signa-
tures have not been of value in helping control fraud because IRS
does not delay issuing a refund until it receives the paper signa-
ture.

Electronic signatures would not only make electronic filing more
efficient by eliminating paper, but if implemented correctly, could
help control fraud, especially if IRS intends to eventually allow tax-
payers to file electronically from their own computers. IRS has pre-
pared a legislative proposal that would allow it to use alternatives
to paper signatures. A similar proposal was included in H.R. 11,
which was passed by Congress in 1992, but vetoed for reasons un-
related to the proposal. As far as we know, that proposal has not
yet been resubmitted.

The one aspect of electronic filing that most attracts taxpayers
is the speed with which they can ^et their refunds, but that speed
makes it difficult for IRS to effectively identify and stop question-
able refunds. One way to deal with that problem is to prevent ques-
tionable returns from being filed. Toward that end, IRS has imple-
mented some controls at the front of the filing process. Before ac-

cepting an electronic transmission, for example, IRS first verifies
that the name and Social Security number match information in
IRS records. If there is a mismatch, IRS will not accept the filing.
In 1993, this check resulted in IRS rejecting about 240,000 returns.
IRS does not know, however, how many of those returns involve at-
tempted fraud or how many were simply errors.

More up-front checks are needed. In that regard, we rec-
ommended that IRS work toward electronically matching employer
wage information with electronic return data. That kind of match
is currently beyond IRS capabilities. Currently, employer wage in-
formation other than that provided by taxpayers is not available to
IRS until after it has processed the returns. This is because of the
time it takes to verify the information and correct any errors.

Under one component of IRS' systems modernization, IRS ex-
pects to electronically receive tax returns, tax information docu-
ments like W-2s and correspondence. Electronic transmission of
W-2s would enable IRS to more quickly verify and correct the in-
formation, thus offering the possibility of having that information
available up front to match with data being reported on electronic
returns.

Once an electronic return is filed, IRS' primary means of detect-
ing fraud involves manual reviews of electronic return data. After
accepting an electronic return, IRS uses computerized screening
criteria to identify questionable returns for possible review.

As we have reported, problems with those criteria resulted in
more returns being identified as questionable than service center
staff could review. Even after IRS revised the criteria, the com-
puter screening manual review process was still labor-intensive
and inefficient. For example, of the 3 million potentially fraudulent
returns reviewed last year, less than 1 percent were determined to
be fraudulent.

Because IRS data showed that many fraudulent electronic re-
turns had been filed by first-time filers who had no history that
IRS could check, we recommended that IRS revise its computer
screening criteria to allow further investigation of first-time filers.
IRS has since done that and has implemented procedures to give
itself more time to assess the credibility of a first-time filer's return
before releasing the refund. As of April of last year, IRS had identi-
fied about 157,000 such returns.

To file electronically, taxpayers can have an IRS-approved practi-
tioner prepare and submit the return or they can take a return
that they have prepared to an individual or business that IRS has
approved as a transmitter. Because some preparers and transmit-
ters have been involved in schemes involving fi'audulent electronic
returns, we recommended that IRS do more to check the back-
ground of these persons before accepting them into the program.

One step we recommended was that IRS obtain access to the Na-
tional Crime Information Center database. That national database,
maintained by the FBI, contains information on various types of
Federal, State and local crime convictions. Internal IRS documents
indicate that IRS has consulted with the FBI and that use of this
data base for suitability checks would require either an executive
order or legislation. We understand that proposed legislation will
be drafted.

Because we believe that the many honest providers of electronic
filing services also have a responsibility to help protect against
fi*aua, we recommended that IRS require return preparers and
transmitters to obtain and retain copies of two forms of identifica-
tion, one with a photo, from persons wanting to file electronically.

At the time of our report, IRS said that it would revise its proce-
dures to include such a requirement for the 1994 filing season. IRS
has since decided not to require but only recommend that two
forms of identification be obtained. IRS concluded that it would not
have resources to effectively monitor compliance with such a re-
quirement.

We believe that IRS should impose such a requirement even if
it is only able to monitor the activities of a small number. IRS
should also consider whether an increase in monitoring resources
is warranted as a step toward improving fraud control.

In conclusion, electronic filing frauds is a problem that requires
urgent IRS attention and IRS has a number of on going efforts. We
continue to believe that our open recommendations, which we have
listed in an appendix to our statement, have merit and should be
implemented as part of those efforts.

In the longer term, it is critical that IRS thoroughly assess its
controls and determine what is needed to adequately protect the
Government's revenues. With a goal of 80 million electronic returns
by 2001, IRS must ensure that fraud control needs like various up-
front matching capabilities are fully identified and considered in
planning its systems modernization. It is also important that IRS
learn from the electronic filing experience by building adequate
controls into the design of future systems like TeleFile and assur-
ing that those controls are adequate before nationwide implementa-
tion.

Attached to my statement is a listing of the related GAO reports
that we have issued on this topic.

With your permission, Mr. Chairman, I would like to add one
more which was done for the subcommittee in 1989. You mentioned
it earlier. It is entitled ADP Modernization: IRS Needs to Assess
Design Alternatives for Its Electronic Filing System. That is the re-
port that discusses the last point I made about the need to work
on long-term systems to ensure that controls are in place before the
systems are deployed nationwide.

That concludes my statement. We will be pleased to answer your
questions.

[The prepared statement and report follow:]

TESTIMONY OF JENNIE S. STATHIS, DIRECTOR

TAX POUCY AND ADMINISTRATION ISSUES, GENERAL GOVERNMENT DIVISION

U^. GENERAL ACCOUNTING OFFICE

Mr. Chairman and Members of the Subcommittee:

We are pleased to be here today to participate in the
Subcommittee's inquiry into refund fraud. Our statement focuses
on electronic filing fraud, an area on which we have previously
reported . '

Electronic filing fraud, while an important issue today, will
become even more critical as IRS moves toward its goal of 80
million electronic returns by 2001. We wholeheartedly support
the need to convert IRS from a paper environment to a more modern
electronic one. But the conversion must be accompanied by
adequate controls against fraud. In the past, IRS has often
appeared more interested in expanding electronic filing than in
ensuring that it fully understood and adequately addressed the
associated risks. As a result, IRS has been in a reactive
posture--adding controls every year in the hope of effectively
dealing with a problem that it did not fully understand.

Thus far, the number of electronic returns identified as
fraudulent is relatively small. The high rate of growth in that
number is of concern, however, because it could reflect an
increase in fraudulent activity rather than the result of
increased IRS monitoring. More troubling is the uncertainty as
to how much fraud might be going undetected.

In 1993, IRS received about 115 million individual income tax
returns. About 12 million of the returns were filed
electronically, or 13 percent more than In 1992. By comparison,
IRS Identified 105 percent more fraudulent electronic returns--
25,633 during the first 10 months of 1993 compared to 12,488 for
the same period in 1992. These 25,633 fraudulent returns claimed
refunds of about $53 million, of which IRS reported stopping
about $29 million before checks were mailed or funds were
transferred to a bank account. However, a recent IRS internal
audit report estimated that about $3 million of the refunds IRS
reported as stopped had actually been Issued.

PREVENTING FRAUD THROUGH DESIGN CHANGES

The risk of electronic filing fraud could be reduced through
changes in the system's design. The system is not fully
electronic. Taxpayers can file tax data electronically but must
still send In paper documents with their handwritten signatures.
Those signatures have been of little value in helping control
fraud because IRS does not delay Issuing a refund until it
receives the paper signature.

Electronic signatures would not only make electronic filing more
efficient by eliminating paper but, if implemented correctly,
could help control fraud--especially if IRS intends to eventually
allow taxpayers to file electronically from their own computers.
IRS has prepared a legislative proposal that would allow it to
use alternatives to paper signatures. A similar proposal was
included in H.R. 11, which was passed by Congress in 1992 but was
vetoed for reasons unrelated to the proposal . The proposal has
not yet been resubmitted.

The one aspect of electronic filing that most attracts taxpayers
is the speed with which they can get their refunds. That speed
makes It difficult for IRS to effectively Identify and stop
questionable refunds once an electronic return has been filed.
One way to deal with that problem is to prevent questionable
returns from being filed.

^ax Administration: IRS Can Improve Controls Over Electronic
Filing Fraud (GAO/GGD-93-27, Dec. 30, 1992) and Tax
Administration: Increased Fraud and Poor Taxpayer Access to IRS
Cloud 1993 Filing Season (GAO/GGD-94-65, Dec. 22, 1993).

Toward that end, IRS, in the last couple of years, has
implemented some controls at the front of the electronic filing
process. Before accepting an electronic transmission, for
example, IRS first verifies that the taxpayer's name and Social
Security number on the electronic transmission matches
information in IRS' records. If there is a mismatch, IRS will
not accept the filing. In 1993, this computer check resulted in
IRS rejecting about 240,000 electronic returns. IRS does not
know, however, how many of those returns involved attempted fraud
or how many were the result of honest errors by taxpayers or
preparers in recording or transcribing names and/or Social
Security numbers.

More up- front checks are needed. In that regard, we recommended
in 1992 that IRS work toward electronically matching employer
wage information with electronic return data.^ That kind of
match is currently beyond IRS' capabilities. Currently, employer
wage information other than that provided by taxpayers is not
available to IRS until after it has processed taxpayers' returns.
This is because of the time it takes to verify the information
and correct any errors .

Under the Electronic Management System- -one of many planned
components of IRS' multibillion dollar systems modernization
effort--IRS expects to electronically receive tax returns, tax
information documents (like W-2s), and correspondence.
Electronic transmission of W-2s would enable IRS to more quickly
verify and correct the information, thus offering the possibility
of having that information available to match with data being
reported on electronic returns.

BETTER DETECTING FRAUDULENT RETURNS

Once an electronic return is filed, IRS' primary means of
detecting fraud involves manual reviews of electronic return data
by analysts in IRS' service centers. After accepting an
electronic return, IRS uses computerized screening criteria to
identify questionable returns for possible review by an analyst.
As we reported in December 1992, problems with those criteria
resulted in more returns being identified as questionable than
service center staff could review.

Even after IRS revised the criteria, as we reported in December
1993 to this Subcommittee, the computer screening/manual review
process was still labor intensive and inefficient.^ We noted,
for example, that of the approximately 3 million potentially
fraudulent returns IRS reviewed in 1993, less than 1 percent were
determined to be fraudulent.

Because IRS data showed that many fraudulent electronic returns
had been filed by first-time filers (persons who had no filing
history that IRS could check names and Social Security numbers
against), we recommended in 1992 that IRS revise its computer
screening criteria to specifically identify electronic returns
from first-time filers as questionable returns for further
investigation. IRS has since done that and has implemented
procedures to give itself more time to assess the credibility of
a first-time filer's return before releasing the refund.

As of April 23, 1993, IRS had identified about 157,000 returns
submitted by first-time filers. IRS' Internal Audit recently
reported, however, that 44 percent of those returns were
mistakenly identified because IRS' computer program did not check

^GAO/GGD-93-27.
^GAO/GGD-94-65.

to see if the person had filed in prior years as a secondary
taxpayer on a Joint return. As a result, those taxpayers had
their refunds delayed unnecessarily.

BETTER SCREENING AND MONITORING OF PREPARERS
AND TRANSMITTERS OF ELECTRONIC RETURNS

To file electronically, taxpayers can have an IRS-approved
practitioner prepare and submit the return or they can take a
return that they have prepared to an Individual or business that
IRS has approved as a transmitter. Because some preparers and
transmitters have been involved in schemes involving fraudulent
electronic returns, we recommended in 1992 that IRS do more to
check the backgrounds of these persons when they apply to
participate in the electronic filing progreun.

One step we recommended was that IRS obtain access to the
National Crime Information Center database. That national
database, maintained by the Federal Bureau of Investigation
(FBI), contains information on various types of federal, state,
and local crime convictions. In a December 1993 memorandum to
the Assistant Commissioner for Criminal Investigation, IRS'
Assistant Chief Counsel for Criminal Tax noted, after consulting
with the FBI, that use of this database for suitability checks
would require either an executive order or legislation. We
understand that Criminal Investigation will be asking Chief
Counsel to draft proposed legislation.

Because we believe that the many honest providers of electronic
filing services also have a responsibility to help protect
against fraud, we recommended that IRS require return preparers
and transmitters to obtain and retain copies of two forms of
identification, one with a photo, from persons wanting to file
electronically. At the time of our report, IRS said that it
would revise its procedures to include such a requirement for the
1994 filing season. IRS has since decided not to require but
only recommend that two forms of identification be obtained. IRS
concluded that it would not have resources to effectively monitor
compliance with such a requirement. He believe that IRS should
impose this requirement even if it is only etble to monitor the
activities of a small number of preparers and transmitters. IRS
should also consider whether an increase in monitoring resources
is warranted as a step toward improving fraud control.

CONCLUSIONS

Electronic filing fraud is a problem that requires urgent IRS
attention, and IRS has a number of ongoing efforts. We continue
to believe that our open recommendations, which are listed in the
appendix, have merit and should be implemented as part of those
efforts .

In the longer term, it is critical that IRS thoroughly assess its
controls and deteirmine what is needed to adequately protect the
government's revenues. With a goal of 80 million electronic
returns by 2001, IRS must ensure that fraud control needs, like
various up-front matching capabilities, are fully identified and
considered in planning its systems modernization program. It is
also Important that IRS learn from its electronic filing
experience by building adequate controls into the design of
future systems, like TeleFlle (which allows certain taxpayers to
file their returns over the telephone), and assuring that those
controls are adequate before nationwide implefflentation.

That concludes my statement. We welcome any questions you may
have.

STATUS OF GAP RECOMMENDATIONS

In our report entitled Tax Administration: IRS Can Improve
Controls Over Electronic Filing Fraud (GAO/GGD-93-27 , Dec. 30,
1992), we made several recommendations. A list of the
recommendations and our understanding of IRS' status In
Implementing them follows.

RECOMMENDATION 1

IRS should seek approval to allow Criminal Investigation staff
access to National Crime Information Center data for the purpose
of checking the background of electronic filing applicants.
Until that approval is obtained, district offices should use the
National Law Enforcement Telecommunications System to check
criminal records maintained by state and local law enforcement
authorities.

Status ( Open )

In a December 1993 memorandum to the Assistant Commissioner for
Criminal Investigation, IRS' Assistant Chief Counsel for Criminal
Tax noted, after consulting with the FBI, that use of this
database for suitability checks would require either an executive
order or legislation. We understand that Criminal Investigation
will be asking Chief Counsel to draft proposed legislation. In
May 1993, in response to the second part of our recommendation,
the Assistant Commissioner for Criminal Investigation sent a memo
to all regions telling them that each district office "should
determine with their respective states if the Information [in the
National Law Enforcement Telecommunications System) can be used
for the suitability checks." We do not know how many district
offices, if any, have contacted the states and/or gotten access
to that system.

RECOMMENDATION 2

IRS should identify electronic filing preparers/transmitters on
IRS computer files so that past year electronic filing
participants who did not pay taxes or file returns or who
otherwise failed to meet electronic filing requirements can be
Included in the annual suitability screening process.

Status (Implemented)

Our recommendation anticipated that IRS would identify electronic
filing preparers/transmitters on its Master File so that those
who become delinquent in their tax responsibilities after being
accepted into the electronic filing program can be automatically
identified for follow up. Instead, according to IRS, it is
achieving the same end by bumping a separate file of
preparers/transmitters against the Master File. What happens to
those preparers/transmitters identified by such matching depends
on the type and severity of the problem. IRS' actions appear
responsive to our recommendation; we have done no audit work to
verify it.

RECOMMENDATION 3

IRS should establish rejection standards for preparers and

transmitters applying to participate in the electronic filing

program who habitually fall to pay their taxes or file their
returns on time.

Status (Open)

IRS said that It has standards and will review them with field
office staff and emphasize their importance. We are not

convinced that the standards of which IRS speaks meet the Intent
of our recommendation.

RECOMMEWDATIOM 4

IRS should establish a procedure to review electronic filing
coordinators' suitability decisions.

Status ( Open )

According to IRS, regional electronic filing coordinators are
reviewing district office electronic filing coordinators'
decisions. However, IRS is still developing a specific procedure
spelling out just what is to be covered in those reviews.
Although having regional coordinators review district office
coordinators' decisions is an improvement over the condition that
existed at the time of our review, we believe that it would be
more appropriate to have the reviews done by persons not involved
in promoting the electronic filing prograun so as to avoid
conflicts of interest. That is why we had suggested that the
reviews be done by district office guality review staff.

RECOMMENDATION 5

IRS should follow through on plans to develop improved computer
checks for identifying questionable electronic returns in time
for the 1993 filing season. These checks should be based on
analyses of the perpetrators of electronic filing schemes and not
restrict service center fraud detection teams from adapting the
checks as fraud schemes are identified during the filing season.
As it modernizes its computer systems, IRS should also consider
electronically matching employer wage information with electronic
return data as a means of validating information on electronic
returns .

Status (Partially Implemented)

IRS modified the computer checks used in 1993 and planned further
changes for 1994, Including enabling service center teams to
adapt those checks to meet local conditions. It also plans to
eventually use artificial intelligence. In the longer term, IRS
said it is working with the Social Security Administration to
find ways to expedite wage withholding information to match
against amounts claimed on tax returns.

RECOMMENDATION 6

IRS should classify electronic returns from first-time filers as
questionable returns for further Investigation and delay
processing those returns until the validity of the filer can be
established.

Status (Implemented)

In 1993, IRS implemented special procedures for electronic
returns filed by first-time filers that, in effect, provided
Investigative staff with more time to assess the validity of the
filer and/or the return. IRS has implemented additional
procedures for 1994 that will preclude first-time filers from
getting a direct deposit (and thus a Refund Anticipation Loan).
This will give IRS more time to assess the return's validity
before issuing the refund.

RECOMMENDATION 7

IRS should require that preparers/transmitters obtain at least
two pieces of identification from electronic filers before
transmitting their returns and retain the pieces of

identification with taxpayers' records. One piece of
identification should be a picture identification.

Status (Open)

Because it was too late to do anything differently for 1993, IRS
only recommended that two pieces of identification be obtained
that year. IRS said that it would require this in 1994. IRS has
since changed its mind, we are told, because it would not have
had resources available to monitor compliance with such a
requirement.

RECOMMENDATION 8

Until electronic filing paper documents are no longer required,
IRS should (1) follow established procedures for warning and
suspending preparers/transmitters who do not submit timely paper
documents and (2) discontinue issuing refunds until the
associated electronic return can be matched with a corresponding
taxpayer signature document.

Status (Partially Implemented)

According to IRS officials in Washington and the field, IRS has
been sending out warning notices and suspending some
preparers/transmitters. We were told that a notice went out in
October 1993 to all preparers/transmitters who had not submitted
required documentation for 5 percent or more of the electronic
returns they submitted telling them that they are being suspended
from the program. Staff at one service center told us that the
center has since suspended about 60 preparers and transmitters.

IRS did not agree with the second part of our recommendation,
saying it would defeat the purpose of electronic filing.

We also had a recommendation in our December 22, 1993, report to
the Oversight Subcommittee (Tax Administration; Increased Fraud
and Poor Taxpayer Access to IRS Cloud 1993 Filing Season) that
was directed at further enhancing IRS' computer screening
criteria.

RECOMMENDATION 9

IRS' Criminal Investigation Division should (1) analyze the fraud
cases IRS identified from information provided by ban)cs that
provide Refund Anticipation Loans (RALs) to see if those cases
involve unique features that should be included in IRS' computer
screening criteria and (2) determine which RAL banks were used
for fraudulent refunds to see if special attention should be
given to banks that do not use the Fraud Service Bureau.

Status ( Open )

IRS agreed with our recommendation but has not yet begun these
analyses .

RELATED GAP PRCTWCTS

Internal Revenue Service; Opportunities to Reduce Taxpayer
Burden Through Return-Free Filing (GAO/G(a)-92-88BR, May 8, 1992).

Tax Administration; IRS C^ul Improve Controls Over Electronic
Filing Fraud (GAO/GGD-93-27, Dec. 30, 1992).

Tax Administration: Opportunities to Increase the Use of
Electronic Filing (GAO/GGD-93-40, Jan. 22, 1993).

Tax Administration; IRS' Test of T^u^ Return Filing bv Telephone
(GAO/GGD-93-91BR, Apr. 26, 1993).

Tax Administration: Increased Fraud and Poor Taxpayer Access to
IRS Cloud 1993 Filing Season (GAO/G(a}-94-6S, Dec. 22, 1993).

(268638)

Ordering Information

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U. S. General Accounting Office
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Orders may also be placed by calling (202) 512-6000.

May 1989

United States General Accounting Office

(j^lQ Report to the Chairman, Subcommittee on

Oversight, Committee on Ways and
Means, House of Representatives

ADP
MODERNIZATION

IRS Needs tx) Assess
Design Alternatives for
Its Electronic Filing
System

GAO/IMT?:C-89-33

GAO

United States

General Accounting Offlce

Washington, D.C. 20548

Information Management and
Technology Division

B-227683

May 5, 1989

The Honorable J. J. Pickle
Chairman, Subcommittee on Oversight
Committee on Ways and Means
House of Representatives

Dear Mr. Chairman:

As agreed with your office, this report provides the results of our
review of the Internal Revenue Service's (iRS) electronic filing system.
Electronic filing has the potential to streamhne the tax processing sys-
tem by allowing individual tax returns to be filed using computers
instead of traditional paper forms. In a prior report, we summarized iRS'
early efforts to develop an electronic filing system.' The objectives of
our current review were to report on the problems this system encoun-
tered during the 1988 and 1989 filing seasons and iRS' approach for
expanding electronic filing nationwide in 1990.

IRS has spent about $13 million through fiscal year 1988 developing an
electronic filing system. Although this system processed about 583,000
returns during the 1988 filing season, it experienced problems when a
m^or software component was unable to operate as intended. iRS also
experienced contracting problems that resulted in payment for defective
software. In December 1988, iRS' electronic filing project office drafted a
proposal for enhancing the current system to achieve the agency's 1990
goal of expanding the availability of electronic filing nationwide. The
project office estimated that about $37 million would be required to
expand, modify, and maintain this system so that it can handle the pro-
jected nationwide volume of about 36 million electronic returns by 1997.

We are concerned about this approach to expand electronic filing
because ( 1 ) the system was originally developed solely as an interim
measure until a nationwide system could be fielded, and (2) irs has not
demonstrated that this approach is the best for achieving the agency's
ultimate goals for electronic filing. Before making a major financial com-
mitment to expand the current system, we believe that iRS should clearly
define its nationwide needs, analyze alternative approaches for meeting
those needs, and resolve its software development problems.

IR.S- ProjUf^ o" 'he Bectronic Filini! System (GAO/lMTEC-88-40. July 13.

GAO, IMTEC-89.M IRS' Elrctronic FUlni; Sysirm

Background

IRS developed a pilot system in 1986 to test the technical feasibility and
public acceptance of electronic filing in a small geographical area. On
the basis of preliminary test results, IBS began developing a system in
1986 to meet its long-range needs for nationwide electronic filing, irs
expected to field the new system in 1988. A key part of its strategy was
to buy mainframe computers to process the electronic returns.

IRS abandoned its development approach for the nationwide system
when the Department of the Treasury rejected iRS' plan for purchasing
the mainframes in November 1986. According to Treasury and irs offi-
cials, Treasury disapproved irs's plan to use an existing contract to buy
computers because (1) the contract was in danger of going into default,
and (2) buying computers for electronic filing was beyond the contract's
scope. IRS estimated it would take until 1990 to compete a new contract
and begin fielding a nationwide system. Rather than delay expanding
the availability of electronic filing until then, iRS chose to develop an
interim system at its Cincinnati, Ohio, and Ogden, Utah, service centers
for use during the 1988 and 1989 seasons.^

IRS' Interim System
Experienced Problems
During the 1988 and
1989 Filing Seasons

According to the Assistant Commissioner for Information Systems
Development, iRS decided to develop an interim system because it
wished to promptly obtain the benefits of electronic filing by making it
available in more districts. The pilot system used in 1986 and 1987 could
not be used for this purpose because it could not handle the increased
work load that expansion would entail, ms proceeded with this strategy
even though its prime contractor believed the interim system might well
fail during 1988 because there was not enough time to adequately design
and test it. iRS also knew that it would have to replace the software used
for storing and retrieving returns because it was not designed to handle
the projected 36 million tax returns expected when electronic filing is
expanded nationwide. This software cost about $1.7 million.

In 1988, the agency expanded electronic filing from the seven metropoli-
tan areas covered by the pilot system to 16 iRS districts, including many
major metropolitan areas. During the 1988 filing season, the interim sys-
tem processed about 583,000 retiunns. The agency believes it has pro-
vided faster refunds to taxpayers by eliminating manual preparation

-To file eleccronic returns usnig the intenm syston, taxpayers typically must pay professional tax
preparers or others authonxed by IRS to transmit the returns- A computer, electronic communicadons
equipment, aitd related software are required. IRS authorizes only those transmitters who apply and
successfully complete IRS tests designed to verify competence in transmitting returns. Tax preparers
may also transmit through an authorized uitermediary firm which transmits directly to IRS.

GAO/niTEC8!M3 US' Electionic FUlng System

and key-entry of data from paper tax returns into iRS' computers. iRS
information indicates that electronically filed returns were processed in
1988 with significantly fewer errors than paper returns; as of April
1988, about 5.5 percent of electronically filed returns had errors vs.
20 percent of paper returns. This should save iRS the additional cost cf
identifying and correcting errors and help taxpayers get correct refunds.
However, we are not aware of any published analyses of the costs and
benefits of this system.

Although IRS was able to process the returns received electronically in
1988, software for a m^or system component did not work as intended.
The prime contractor responsible for developing the software for storing
and retrieving electronic returns could not deliver this software until
December 1987, 3 months behind schedule and just 1 month before the

1988 filing season. According to the Chief of irs' Compliance Systen\s
Testing Branch, this prevented iRS from thoroughly testing the software
to ensure that it worked properly before using it. In pursuing an overly
optimistic schedule for system development, irs was driven by project
milestones geared to implementing a system in time for the 1988 filing
season. According to the Assistant Commissioner for Information Sys-
tems Development, iRS accepted the risks of this development approach
in order to achieve the expected benefits of the system as soon as
possible.

Ultimately, the software never worked correctly. Specifically, an elec-
tronic replica or image of the returns could not be stored and retrieved
as fast and reliably as needed for processing. As a result, stop-gap man-
ual operations were necessary to correct errors. IHS tax examiners had to
print paper copies of returns, annotate their corrections, and store these
paper records. iRS decided to replace the defective software prior to the

1989 season and reprocess the returns filed during 1988 using the new
software so they could be properly stored and retrieved.

The system experienced similar problems in 1989 because the replace-
ment software was not ready on time. As a result, iRS again had to print
paper copies of thousands of electronic returns that contained errors in
order to correct them and issue refunds. iRS decided to install portions of
the incomplete software in mid-February, to avoid printing more of
these returns. According to iRS officials, the replacement software will
not be completely installed or fully tested until about mid-April, the end
of the 1989 filing season. The replacement software is expected to cost
about $2 million.

GAO/IMTEC.89-33 IRS' Electronic Filing Syslpm

Contract Terms for
Performance
Requirements and Test
Periods Were
Inadequate

According to electronic filing project office officials, irs' failure to
clearly define system performance requirements or allow enough time to
decide whether the deliverables were acceptable contributed to the
problems with the defective software in 1988. iRS developed this soft-
ware by engaging Vanguard Technologies, Incorporated, under a previ-
ously awarded support services contract that required the agency to
obtain from Vanguard certain automated data processing services, such
as the design and ir\stallation of software for major projects. iKS issued a
task order under this contract containing 80 contract deliverables for a
multi-phased design and development effort. Portions of the work under
this task order were subcontracted, including the development of the
1988 software discussed above.

In failing to clearly define critical performance requirements for the
software in task order documents, iRS did not, for example, specify the
volume of returns the software should be able to handle during peak
processing periods or the response times acceptable during these peri-
ods. According to the project office, the software had to be replaced
because it could not meet the response times that would be required for
1989 and beyond.

The Chief of iRS' Capacity Management Branch — which is responsible
for providing technical assistance to other iRS offices — stated that his
staff could have helped the project office write adequate contract per-
formance requirements. The project office did not take advantage of this
opportunity for assistance, in part because iRS procedures do not require
project offices to seek technical assistance from the Capacity Manage-
ment Branch. The project office has been working with the Capacity
Management Branch in developing recent contracts for the 1989 filing
season. As a result, the contract documents for the 1989 system more
explicitly state performance requirements. For example, the contractor
is required to develop software that will store 750,000 electronic returns
per week. The Branch Chief stated that iRS procedures should be clari-
fied to help ensure that iRS project offices obtain the necessary technical
assistance from the Capacity Management Branch in developing
systems.

When defining the acceptance period for software to be delivered under
the task order for the 1988 system, irs did not allow enough time for
quality assurance testing. The task order issued to Vanguard allowed iRS
only 10 days to evaluate each deliverable. According to the iRS testing
plan, however, quality assurance testing for the software designed to
store and retrieve electronic returns required about 3 months.

GAO/IMTEO«9.33 IRS' Electronic Filing System

IRS paid Vanguard about $186,000 for subcontractor-developed software
that failed to work properly. Of this amount, iRS authorized that Van-
guard be paid $ 124,606 for the installation of software at iRS' Cincinnati
Service Center before testing was completed. iRS authorized payment for
the software on January 20, 1988. The Compliance Systems Testing
Branch began software testing during the week of January 17, 1988,
and terminated testing on April 22, 1988, about 3 months later. Accord-
ing to the final testing report, the software should not have been
accepted because of numerous unresolved problems. In addition, iKS took
about 4 months to reject the software at the Ogden Service Center
because it did not work as intended. Nevertheless, ms eventually paid
Vangu£u-d $61 ,315 for the installation of the Ogden software. According
to a project official, iRS could not require Vanguard to revise the soft-
ware because the contract terms had not provided adequate perform-
ance criteria to clearly establish the contractor's accountability for these
revisions.

For 1989, in an attempt to allow more time for testing task order
deliverables while also meeting project milestones, the project office
increased the acceptance period to 20 days. According to the Chief of
the Compliance Systems Testing Branch, however, 20 days still does not
allow sufficient time to perform software quality assurance testing.

IRS Faces a Critical
Decision Regarding the
Future of Electronic
Filing

By 1997, the agency projects that over 36 million of an anticipated total
of 123 million returns will be filed electronically. After the 1988 filing
season, the electronic filing project office abandoned its earlier plans to
replace what began as a 2-year interim system with a new nationwide
system in 1990. Instead, in December 1988, the project office proposed
enhancing the current system to achieve its 1990 goal of expanding the
availability of electronic filing nationwide. In February 1989, the project
office estimated that about $37 million would be required to expand,
modify, and maintain the current system and about $139 million more
would be necessary to operate it from fiscal years 1989 through 1999.
Through fiscal year 1988, iRS had already spent about $13 million in
developing, prototyping, and operating an electronic filing system.

IRS has yet to clearly identify its needs and evaluate the costs, benefits,
and technical feasibility of alternative approaches, as required by fed-
eral regulations. Performing this analysis would help iRS determine the
best approach. Specificsdly, iRS has yet to;

GAO/IMTEC«»^ IBS' ElectToale Filing SyMem

assess whether the current system will meet iRS' nationwide needs, since
it was developed as an interim system. iRS has not performed an analysis
of these needs;

decide how to minimize the burgeoning, paper-intensive aspects of the
current system. With each electronic return, the tax preparer must sub-
mit a signature form and W-2. Responsible iRS officials said that during
the 1989 filing season, irs employed 47 people to receive, review, and
file these forms, not including data entry staff who transcribe this infor-
mation into the computer. iRS is considering the legal implications of
eliminating the requirement for original signatures and W-2s. Depending
on how this issue is resolved, irs may eventually modify the system so
that signatures and W-2s can be transmitted electronically. This could
significantly affect system design and costs; and
decide how the current system will accommodate the processing of tax
due returns (presently planned for 1990). Since the current system now
handles only refund returns, it will have to be modified to handle tax
payments through electronic transfers, credit cards, or other means.

Treasury officials share our position that iRS needs to define require-
ments and assess alternatives. In January 1989, Treasury directed irs to
perform the analysis necessary to identify the best approach.

Ck)nclusions

IR.S plans to expand electronic filing nationwide in 1990 based on its
potential benefits in reducing the costs and errors in processing returns
and providing faster refunds to taxpayers. However, the agency will not
know whether the current system t)eing proposed by the electronic filing
project office is the best approach for accommodating expansion until it
clearly defines system requirements and evaluates the costs, benefits,
and technical feasibility of other approaches.

In attempting to field the interim system, iRS experienced software
development problems with a major system component, irs also expe-
rienced contracting problems that resulted in payment for software that
did not work as intended. Specifically, iRS did not (1) clearly define prod-
uct performance requirements in contract documents, or (2) allow
enough time for thorough product testing.

Recommendations

We recommend that the Commissioner of Internal Revenue validate the
design approach for the nationwide electronic filing system before
selecting and funding a system. At a minimum, irs should:

GAO/IMTEC-gS.3.1 IRS' Elmmnic FilinK System

clearly define system requirements for nationwide implementation. For
example, irs needs'to determine how it will ( 1 ) minimize the burgeoning,
paper-intensive nature of the current system, and (2) acconunodate the
processing of tax due returns; and

identify and analyze the costs and benefits of various alternatives for
meeting the requirements for a nationwide system.

We also recommend that the Commissioner ensure better management in
contracting for automated data processing support services by:

revising irs procedures to require project offices to get technical assis-
tance in writing and negotiating contracts for magor automated data
processing systems; and

allowing enough time to thoroughly test deliverables, thereby ensuring
product quality.

Objectives, Scope, and
Methodology

The objectives of our work were to assess the problems encountered
during the 1988 and 1989 filing seasons and irs' approach for develop-
ing a nationwide electronic filing system. We conducted audit work
between July 1988 and March 1989 at the Office of the Assistant Secre-
tary of the Treasury for Management in Washington, D.C.; irs' National
Office in Washington, D.C.; the irs service centers in Cincinnati, Ohio,
and Ogden, Utah; and the Fairfax and Springfield, Virginia, offices of
Vanguard Technologies, Incorporated. We reviewed various planning,
contracting, and technical documents for the electronic filing project. We
also reviewed the minutes of irs' executive-level committee meetings
dealing with electronic filing and interviewed officials associated with
the project. Our work was performed in accordance with generally
accepted government auditing standards.

The information contained in this repwrt was discussed with responsible
irs officials, and we have incorporated their comments where appropri-
ate. This report was prepared under the direction of James R. Watts,
Associate Director. Other major contributors are listed in appendix I.

GAO/IMTEr-SS.;» IRS- Elmronir FUlnif System

As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution until 30 days from the date of
the report. At that time, we will send copies to interested parties, includ-
ing the Commissioner of Internal Revenue, and make copies available to
others upon request.

Sincerely yours.

Ralph V. Carlone

Assistant Comptroller General

GA0/IMTEO8»33 IBS' Electronic FUing Sysir

Appendix I

Major Contributors to This Report

TnfnrmJitinn James R. Watts, Associate Director, (202) 275-3455

UUOI llldUUii ^^^ g„p^ Chervenic, Assistant Director

Management and Richard H. Clough, Evaluator-In-Charge

Technology Division, ^^ " »»• Evaiuator

\k7 V, ■ rt*- r» C Charles D. Hughes, Evaiuator

WaSningtX)n, U.U. Kim Moddasser, Evaiuator

^. f n ^- „ 1 DanielJ. Kirwin, Site Senior

Cincinnati Regional ^^^ j„ uwnartl, Evaiuator

Office

GAO/IMTCCaMS IBS' El«tniiiic Filing SyMcm

Chairman Pickle. Your appendix will be attached to your testi-
mony and be made a part of the record. I thank you and I thank
Ms. Richardson for your testimony.

Overall, the committee recognizes that we have a very difficult
problem ahead of us. I am impressed with statements that Ms.
Richardson has made about what the plans are at the IRS and
with the GAO report. I recognize that we should be careful as we
proceed to better understand the problem and to analyze specific
steps that should be taken.

Today I don't want to elicit from you specific plans that you have
to tighten up on ft-aud detection. I think both Ms. Richardson and
Ms. Stathis have given us a broad picture of what is being done
and what is going to be done, so I don't want you to delve into the
future about alarming developments. I am going to ask specific
questions. I know it is a little late; it is 12 o'clock, but we may take
a little more time.

Now, in the first place, Ms. Richardson, you have mentioned in
your testimony at the beginning that you had detected some 200
refund schemes during the first month, already, the last 30 days.
I want you to submit to our committee the 200 cases. I request that
you submit to us the 200 cases, somewhat of a detailed report on
these particular schemes to determine whether a refund was issued
or whether an identical scheme perpetrated next month would not
happen again.

IThe information was not received at the time of printing.]

You have 200 cases. We want to examine them. We want to
know what has been the action, refunds made, people detected,
suits filed, and what is the status of them. I am more concerned
in knowing if the same thing will happen in March and in April
and in May.

I want to know what is happening and what steps you have
taken or can take to see that that doesn't happen again. Our prob-
lem overall is to try to correct there problems rather than just pub-
licize them. That is one thing I want to request.

Now, I would say that is the first thing I want to do.

Second, I am going to request that GAO establish another task
force on this problem and have a sort of multifunctional task force
to conduct a comprehensive analysis of this whole problem. I would
like to have this task force make another report to us by Septem-
ber 1.

Ms. Richardson said she would give us a report at the end of the
year on their operations. I am not going to wait until the end of
the year because Congress may be hot on the campaign trail. But
by September 1, I think you are going to have a better picture and
so I want a task force formed, multifunctional, GAO, IRS, and on
any of your committees and this committee, so we can keep in-
formed what is happening.

I am going to make that as a specific request,

I want to refer to a matter that I think we all recognize has
taken place. The GAO report to this committee stated that "IRS
had been more interested in expanding the electronic filing than in
ensuring that it is fully understood," and I think that is correct and
we all admit that.

You made mention in your report, Ms. Stathis, that our commit-
tee and you now, GAO, has reviewed a confidential Internal Reve-
nue report prepared by a private contractor for some $25,000. That
has not been made available to the public. So I want to ask first
with respect to that particular study, Ms. Richardson, can you tell
us what that report says?

Ms. Richardson. I think the report is something that we com-
missioned because we felt, as I mentioned in my testimony, the
need to touch base with outside experts as well as the experts with-
in the Service, and I think that the thrust of the report is that we
very much needed to try to put into effect, which we have done for
this filing season, the three studies so that we can get a sense of
the magnitude of the problem, the types of issues that we are faced
with, so that we can go about preventing it.

We need to, as I said in my testimony, analyze the extent of the
problem so we can

Chairman PiCKLE. My question is can you tell us what the report
says?

Ms. Richardson. Well, not in terms of the specifics of the report.
I don't think we would be prepared to discuss those here in the
open session. But I think it is fair to say that the drafter of the
report has been working with us to help us design filters and sys-
tems that we put into place for this filing season and things that
we will be doing long term.

Chairman Pickle. Can you mention whether the study indicated
that the losses to IRS has been in the millions or in the billions?

Ms. Richardson. I think the drafter of the report said that based
on his guesstimate, and what he knew from what we had done in
terms of fraud detection, that it could be possibly in the billions as
opposed to in the millions.

Chairman Pickle. Have you shared this confidential report, if it
is, with the Treasury Department?

Ms. Richardson. We have discussed it with them, yes.

Chairman Pickle. When did you do that?

Ms. Richardson. Over the last few weeks.

Chairman Pickle. I understood that you had not talked to Treas-
ury and I assume that was yesterday or this morning; is that cor-
rect?

Ms. Richardson. No, I don't think that is accurate.

Chairman Pickle. What is accurate then? When did Treasury
know about this?

Ms. Richardson. I am not sure when they first knew about the
report.

Chairman Pickle. Mr. Dolan, how long has Treasury known
about this report?

Mr. Dolan. I am not sure Mr. Chairman. I suspect at the same
point in December when the GAO was communicating with this
subcommittee that the report was in existence, they knew it then.
I also know that they knew in 1992 and 1993 that we had basically
declared this whole area in the FMFIA process.

Chairman Pickle. I am talking about these specific reports.

Mr. Doi^n. I think maybe going back to the GAO date

Ms. Richardson. Probably in December.

Chairman Pickle. Then your testimony is that IRS was notified
that this report existed as of December last year?

Mr. DOLAN. That is speculation on my part. I would assume at
a minimum they knew at that point when the report was released.

Chairman Pickle. Mr, Brown, do you know when Treasury knew
it?

Mr. Brown. I don't know who might have briefed Treasury offi-
cials. All I can tell you is that I personally briefed one person yes-
terday, but other than that, I don't know what prior conversations
had occurred.

Chairman Pickle. As far as you know, the first time Treasury
knew about this was yesterday

Mr. Brown. No, sir. The only thing I can say is the first time
yesterday that I talked to that person is the first time he knew
anything yesterday.

Chairman PiCKLE. I hope we will produce this study, because it
was a factual study. I assume it was a reliable study. Do you think
it was?

Ms. Richardson. I think for the kind of study that it was, I
think we certainly believe that the contractor had a significant
amount of expertise with financial fraud. I think it was based on
a very limited time period and a limited review of documents.

It was done in order to help us short term do things for this fil-
ing season and then help us work on long-term issues in the fraud
area.

Chairman PiCKLE. If you commissioned an individual to conduct
a study and it was done, and you paid $25,000 for it, and you had
confidence in him, you say you think he gave a good report, then
I think we ought to be able to share it. I am urging you to do that.
I am not asking you to do that today, but we are interested in one
thing; is the problem as big as we think it is or bigger?

I think it is bigger than we think it is and we better do some-
thing about it. Every IRS Commissioner in the past few years has
stated that we are going in the direction of electronic filing and
each Commissioner has said over the years we will have 80 million
of these returns filed by the year 2000. That is a laudable goal and
we must go into the electronic age. But as we do that, we have to
see that our system is better protected and say how can we fix it,
what can we do about it.

I yield to Mr. Houghton.

Ms. Richardson. One thing I would like to say, because I think
it would be a mistake for people to assume that there may not have
been fraud in the paper process some time ago. I think what the
move toward electronic filing and being able to get more data on-
line has been able to do for us is allow us to detect patterns and
schemes more readily.

Ironically, although the focus has been on concerns about elec-
tronic filing, I think that has been the very thing that has helped
us uncover fraud, and I hope after this filing season, when we have
had a chance to do the three studies, that we will have a better
handle

Chairman Pickle. I am sure the studies will help. I want to yield
to Mr. Houghton.

Mr. Houghton. I would like to thank the Commissioner and Ms.
Stathis and the others for being here.

A couple of questions, first a specific one. The IRS authorizes cer-
tain individuals, tax practitioners, to become electronic return
originators. These individuals are checked out to a degree.

To what degree though does the IRS exercise any control over
tax return preparers in the conduct of their business?

Ms. Richardson. Mr. Brown will be in a better position to an-
swer that question.

Mr. Brown. I think first, and generally, the IRS does not regu-
late the return preparer industry. Whether they were CPAs or at-
torneys practicing in the area of tax, they are regulated by State
agencies. The only group that we have some control, or passage, is
first your enrolled agents; and second the electronic return origina-
tors, and that is not a test of tax proficiency, but a suitability to
transmit information to us.

When we get an application from a potential electronic return
originator, it goes through a suitability test. We look to see what
their history is with the IRS, are they already known to us as ei-
ther a problem, a recalcitrant taxpayer in their own right, or a
business problem with us as a questionable return preparer — then
we check to see if there are any other things in the background
within the organization that might be known.

You have heard about the difficulty from GAO with NCIC
checks. Basically, if we don't see anything at that time to alert us
of a problem, then they are approved as an ERO and would be as-
signed the electronic identification number.

The rest of the process is monitoring during the filing season at
the district level of EROs to see if they are complying with the re-
quirements of the revenue procedures; basically are they keeping
the right kinds of records.

If we identify problems in our process, either as potential fraud,
of course, the Criminal Investigation Division gets involved, but
even if we identify potential processing problems in terms of timely
submission following the rules, the district office is the group that
follows up on that and tries to determine if that number should be
revoked and their right to transmit to us be revoked.

Mr. Houghton. I don't mean to be fiip, but say that in a sen-
tence.

Mr. Brown. We don't regulate the industry in general. We do a
basic suitability check of new applicants to be EROs. We do some
monitoring to see that they are conforming to our rules and if they
aren't, we throw them out.

Ms. Richardson. One of the things we are looking at closely as
we go through this filing season is to see what additional actions,
if any, we might need to regulate ERDs.

Mr. Houghton. I understand from what you said this is what
you do, but it would seem to me from the testimony of the other
two gentlemen earlier that we are moving into Never-Never Land.
I just read about this recent glitch in Internet. It is scary. These
so-called locks or bridges which you go through can easily be pene-
trated.

So the question is, is the system which you have now — ^you can't
be the Gestapo — but is the system suitable for doing the types of
things you know are potentially out there?

Ms. Richardson. It was clear that you wouldn't necessarily have
to have a preparer to sign a return to have a scheme if they could
get enough people involved in the process. While I think that we
are looking very carefullv at what additional authority we would
need, I don't think I would view that as a panacea for snuflfing out
all schemes.

Mr. Houghton. Let me try to summarize what I heard from the
gentlemen we had earlier and see if you disagree.

The situation in terms of fraud is very big, a lot bigger than any
of us realize. At a minimum, it is four times larger than what you
have picked up, meaning half a million dollars could get into the
billions.

The electronic filing system which you are moving toward makes
it easier rather than less easy to create fraud. The system is not
working. For example, if it is so easy to get an employer ID number
then it also should be possible to alert people more succinctly that
there is a problem out there if they start fiddling around with this,
because they are going to go to jail.

Do you agree with those general points?

Ms. Richardson. I am not sure that I do completely.

Number one, I don't know on what basis one of those people has
to speculate that the 25 percent number is correct or that there are
4 times as much.

Mr. Houghton. As he said, he doesn't know there is 25 percent.
The impression I got and from previous conversations that some of
the staff has had is he said you don't really understand the mag-
nitude of what is going on out there, because he knows the people
that are doing this and they are not getting caught.

Ms. Richardson. I have no basis for knowing his knowledge.
What I do think would be a mistake would be to conclude from his
testimony — and I think the other fellow that was here confinned —
is that this is not a problem peculiar to electronic filing.

The electronic filing, I think, has allowed us to recognize that
there are vulnerabilities to the processing system and to be able to
identify them much more quickly. I personally — and I believe what
the chairman said in his opening comments is accurate — I think we
should not be emphasizing the rapidity with which you can get
your refund, but emphasizing the benefit of electronic filing in
terms of reducing paper and in terms of the accuracy, but I clearly
support efforts to try to find ways to prevent and detect fraud.

I do understand that it is a serious problem and we are trying
very hard to get a handle on it. I look forward to working with
GAO and with your subcommittee and subcommittee staff to try to
see what we can do because it is nothing peculiar to the IRS.

Banks, credit card companies, insurance companies are con-
stantly fighting this problem. It is not widely discussed, but it is
clearly a problem when you have a opportunity for money to be
passed out.

Mr. Houghton. If you had a similar report to the one that the
chairman has referred to put on your doorstep, would you be will-
ing to share this with the subcommittee right away?

Ms. Richardson. I am not-

Mr. Houghton. If you had a report similar to the one the chair-
man talked about come to your desk and it showed something that
is untoward in the system, would you be showing it to our sub-
committee even without a hearing?

Ms. Richardson. I think in the course of discussing the issue,
we certainly would. I don't think there is anything in the report
that is embarrassing.

I think what is in the report, there are some things that discuss
criteria that should be looked at, criteria that have been looked at,
what has worked and what hasn't, and I don't think that is some-
thing that we would want to make public.

Mr. Houghton. But if there is a report that has an impact on
our oversight function and is important to the overall scheme of
things that you are involved in in the IRS, you would make such
a report available?

Ms. Richardson. Yes.

Mr. Houghton. Let me ask Ms. Stathis two questions in terms
of the extent and second about capability. What do you really be-
lieve, from the knowledge you have, from the reports you have
seen, is the extent of this fraud; and also, does the IRS, even with
your recommendations, have the capability to get on top of this
issue?

Ms. Stathis. As we said in our statement, Mr. Houghton, we do
not know the true dimensions of this problem. There really are not
the kinds of data there to estimate with any great comfort level.
It is the type of thing that you look at the system, you try to see
what vulnerabilities are there and try to make what recommenda-
tions you can to try to shore up those vulnerabilities.

Mr. Houghton. The last accounting was that there were roughly
60,000 people and a little over $100 million taken in. Is that the
order of magnitude you think is there or is there something far
greater?

Ms. Stathis. As we said, the troubling aspect of this is to think
about what is not being detected. I suspect that there is an amount
of it not being detected, but I have no idea how large that might
be.

Mr. Houghton. What about the capability of IRS to get on top
of this?

Ms. Stathis. I think that is a question the Service is going to
have to think about as it works on the various scenarios that have
been presented to it. I don't believe that we normally as govern-
ment employees think as though we are fraud perpetrators, so the
systems are designed with people in mind who have good intent.
We are going to nave to step back and think about these systems
with a fraud perspective and think about how they might be used
to

Mr. Houghton. Any change would be one of attitude rather than
equipment or sort of technical capability?

Ms. Stathis. I believe that the consultants' report that you have
been discussing is a first step in seeking the type of expertise that
is needed to understand what possibilities are out there. So I be-
lieve that IRS has the capability through its own staff and through
contracts with outside people to obtain the expertise that it needs.

Mr. Houghton. Thank you.

Ms. Richardson. One of the things, just to followup, I think it
is clear that our voluntaiy system of compliance is built on trust
and reliance in the integrity of the vast majority of people that we
have to deal with. It is clear that not everybody has the same kind
of mind set.

I think it is fair to say that it hasn't been until very recently that
IRS has taken steps to really think about the possibility of the ex-
tent of the fraud because we have had a voluntary system. It is not
often that people file tax returns — we welcomed all comers, as you
can imagine, so it is not often that we would have been looking for
returns fraudulent in the — overstated deductions and understated
income.

We are clear in our own minds that we have to look at things
differently. That is why Mr. Brown is here. That is what our chief
inspector and his people have been doing. We are anxious to work
with credible, outside consultants to help us in any way to identify
the magnitude of the problem and to help us prevent it from occur-
ring in the future.

Chairman PiCKLE. Ms. Richardson, our problem is made much
more difficult because we are trying to achieve the filing by elec-
tronics. But the creation of the EITC is an invitation for a lot of
people to try to reach out and get the money and get it quickly.
Even though we know that is a problem and we are a compas-
sionate Nation, we know we are going to raise that amount because
we want to help people who really need it, and the promise is that
we will get it to them immediately.

I think we have to slow down. It normally takes 14 days to proc-
ess one of these claims. That is pretty much the average you have.
I noticed somewhere that the IRS is talking about shortening that
time. Do you have any intention of trying to shorten that 14-day
period?

Ms. RiCHAi?DSON. I certainly don't until we have a handle on how
that is going to impact on the potential for fraud.

Chairman Pickle. This committee would certainly agree with
that.

Ms. Richardson. I think that that is one of the things we have
to look at in the context of what we discovered during the filing
season. I know there is no reason for speeding up the refund proc-
ess if that contributes to fraud and we are certainly not going to
continue it.

One other thing in terms of the earned income tax credit. We are
promoting very heavily the advanced earned income tax credit so
that people can actually get their earned income credit as they re-
ceive their paychecks over the course of the year as opposed to a
lump sum.

Chairman Pickle. That is another subject to look into later.

Mr. Hancock.

Mr. Hancock. Thank you, Mr. Chairman.

I have not read the report and in fact I know very little about
it. However, I would like to ask, was there any recommendations
made in the report or was this just a statement of fact?

Ms. Richardson. There were a number of statements, some fac-
tual and some speculative, and there are a number of recommenda-

tions, some of which we have adopted for this fiHng season, some
of which we will be incorporating longer term.

Mr. Brown might like to address specific things that were in the
report that we are doing.

Mr. Brown. The first recommendation was that we had to take
a multifunctional approach. We did have Criminal Investigation
and Returns Processing looking at the problem in functional stove
pipes. That was one. We had to look at it overarching.

Second, we needed to do some sampling to get more accurate,
statistically valid information about the size and scope of the prob-
lem. He made some suggestions about how fast we should do that
and we have completed the pull of our first sample and, as the
Commissioner mentioned in her opening comments, we are doing
the confirmation now.

The third was to review our screening, or scoring formula, itself,
that GAO described that needs to be enhanced. We have been lim-
ited in the past by our computer capacity to do much more ad-
vanced statistical scoring.

He suggested we need to take a look at that and if we can't do
it in-house, to engage outside experts in the field.

Another area was to watch the commitment to decrease or im-
prove the speed at which we issued refunds, that maybe we
shouldn't commit to speeding up refunds until we had the protec-
tions in place.

Another was to try to really focus on pre-refund identification of
the returns. With this type of fi^aud, once the refund has gone out,
even if when you find it, whether it is 1 week or 6 montns later,
you have a much tougher problem, either finding the perpetrator
or recovering the money and that increases the attraction of it for
other fraudsters.

So we have stepped up our pre-refund efforts this year. Those are
the kinds of things, specific recommendations, that he made that
we are trying to react to.

Mr. Hancock. Ms. Richardson, if you recall right after you took
over as Commissioner, I came to a reception at your office. I fig-
ured if I was ever there, that is the way I wanted to be there.

At that time, you and I discussed the possibility of the Revenue
Service itself looking into these areas of compliance cost, change in
depreciation schedules every year, first one thing and another
about the simplification of the Tax Code.

Frankly, Mr. Chairman, we may be at a point in time that this
might be able to be accomplished because of the complications and
the fact that we are attempting to do something about it. There
wasn't anything in these recommendations about, for instance, get-
ting rid of a whole bunch of schedules? There is no way that we
could even have a Tax Code like we have now if it wasn't for com-
puters.

It could not be done. There is not enough people that can do that.
Has this even been considered? You and I talked about it. Have
you set up a little task force to see if, in fact, we could help reduce
compliance costs?

Ms. Richardson. The particular report you are referring to did
not address any issues relating to simplification and that sort of
thing.

We are working with Treasury. We have sort of an ongoing re-
view of regulations and provisions that are unduly complicated and
we also have been working with Treasury to try to come up with
simplification measures.

I can't tell you that it is something that is on the front burner
and will be here next week, but we are cognizant of the need to
simplify the law, particularly the administrative side. It makes our
job easier when the law is simpler.

Mr. Hancock. One more question. I am going to approach the
subject even though I understand it will be a very sensitive ques-
tion. There have been comments made in various reports and what
have you about the possibility that there are some people getting
into fraudulent acts that have obtained their information from IRS
employees on how to go about doing this.

Ms. Richardson. I don't know that I am aware of that.

Mr. Hancock. My question is what type of internal investigation
or what type of internal controls do you have aimed at monitoring
this? I am a small businessman. We do have bonding, and we have
ways that we monitor what our people are doing. I would like to
know if, in fact, you do have internal controls and what you are
doing in that area?

Ms. Richardson. We do very definitely have internal controls. I
think the person to address them is our Chief Inspector who is, in
effect, our Inspector General, Gary Bell.

Mr. Hancock. The reason I ask the question is because I believe
a lot of people ought to know that, yes, in fact you do have this
because I know you do.

Mr. Bell. Inspection is comprised of internal security which does
investigations of our employees or internal audit. We use computer
checks of our data files to determine employee wrongdoing. There
are instances where — I don't have the examples with me today —
employees have been involved and have been detected through data
analysis, file analysis similar to what we do in the questionable re-
fund program and then we investigate and evaluate the areas with
our inspection staff.

Mr. Hancock. I just wanted the public to know that, yes, these
steps are being taken. I know they are being taken and I know
some of the other things that you do, too, to work in that area.

Ms. Richardson. I think we have a very strong investigative
side and internal audit side and both arms of inspection have done
an outstanding job in helping us with some of the issues we are
talking about here today.

Mr. Hancock. I believe you are right.

Thank you.

Chairman Pickle. Ms. Richardson and Ms. Stathis both, I be-
lieve GAO has recommended to our committee that we not shorten
this to 14 days; it ought not go less than that. Ms. Richardson indi-
cated she has no intention of trying to shorten that time and I
think our committee would agree with that.

The IRS Taxpayer Ombudsman has criticized the electronic filing
process because low-income taxpayers seeking quick refunds incur
disproportionate costs to use the electronic filing program. On aver-
age, it takes about $30 to file electronically and it takes another

$30 on average to obtain an application for a RAL. That is $60 that
the taxpayer is out.

The 0MB has indicated to us that they don't know whether that
is a good deal or not because the IRS saves about $1.62 on one of
these filings as compared to a $60 cost to the taxpayer. Miss
Stathis, is that basically correct?

Ms. Stathis. As far as I know those are about the right num-
bers.

Chairman PiCKLE. Is electronic filing a good system, a good deal
for the taxpayer?

Ms. Stathis. From the perspective of the taxpayer, particularly
low-income taxpayers, it is quite problematic. A report we did on
IRS' marketing strategy for electronic filing talks about who is
being served and who isn't and notes that the way the marketing
has gone thus far appeals more to low-income people than to
higher-income people.

Chairman PiCKLE. Someone this morning indicated that you do
not issue EROs.

Ms. Richardson. We don't.

Chairman Pickle. If a tax preparer wants to get an ERO, to
whom does he apply?

Mr. Brown. We do the suitability test. The Service issues ap-
proved persons to be EROs.

Chairman PiCKLE. Do you issue employer numbers?

Mr. Brown. Identification numbers, right.

Ms. Richardson. Mr. Chairman, one of the things I would like
to say — and I have said this before — I feel very strongly that every
person who wants to file electronically should be able to. We have
been looking for ways to make it economical for everyone.

We have this year, in a number of our offices, made available op-
portunities for people to come in and file electronically without
cost. I think that is the kind of thing we would like to expand. We
have TeleFile, which I think we have had about 100,000 filers al-
ready. People can call and punch in their information over the tele-
phone. That is a free service.

It is basically for people with simple fairly straightforward re-
turns, but those are ways that we are trying to move to accommo-
date the concerns that I know you have had in the past and we
do, too, about the cost of the system.

Chairman Pickle. I think filing electronically is going to be done
more and we have to find ways to handle that. We are not going
to keep on just handling it just by paper refunds, but I think we
need to make a lot of corrections and we better make them quickly
or else the public is going to continue to defraud and beat the Gov-
ernment out of money and taxpayers are openly violating the law
because they don't figure they will get caught.

We heard this morning that the people who allowed their names
or their Social Security numbers to be used knew at the time and
in all probability that this was fraudulent, yet they wanted to par-
ticipate because they wanted to get the money. It is easy as pie,
they testified.

Assuming this is correct, or even in the broadest sense it is cor-
rect, we have to make big changes. When we have our report again
in September, this task force, I hope and believe that at that time

we will have about 100 percent or nearly 100 percent or the big
majority of these problems worked out. If not, I am going to rec-
ommend that there be a freeze on electronic filing.

I recognize that means that the people would go back to paper-
work and we are trying to get away from some of that, but I think
we have to correct the problem and I am going to insist it be done.
I am going to recommend that the GAO go out next month and in-
vestigate some 5500 EROs — that is only 10 percent of the number
you have — to see if they exist and what they find.

You have 55,000 of them, take 10 percent of them and give us
a report of what you got. I think we need to know exactly what are
your standards for an ERO, how easy it is to get an ERO number
and identification number. The big question is can you make these
corrections by this fall?

Ms. Richardson. I think what we have to do is identify what we
need to do and then work with you all to let you know whether we
can. There are some things that are long-term systemic issues that
I don't think can be done by next year. There are other things that
I think we can do.

Chairman PiCKLE. This committee ought to support your advo-
cacy of funds for the TSM program and we have to support your
budget bigger and better if you need it.

Ms. Richardson. That is clearly the answer to our long-term

Chairman PiCKLE. Every dollar we spend we would get $3 or $4
back if we do it right. So this committee, I think, will support you
on that.

The question that comes to mind is do you have the equipment
to really make these findings or corrections?

Ms. Richardson. I think there are some things that we presum-
ably will identify that we can do for next year and we are bringing
online additional equipment over the years, so there may be addi-
tional things that we can't do today that we would be able to do.

There are other things that are further into the future.

Mr. Brown. Many of the ideas and solutions that we have are
equipment and capacity and computing power dependent, and we
keep rolling out different pieces of TSM so as the new piece comes
out, we can implement additional controls.

The question of what we can do by September or January is very
much dependent upon the systems.

Second, some of the research being done by Los Alamos, for ex-
ample, will be iterative. Because of systems limitations, we will add
some capability this year, next year and in 1996. It will be an it-
erative process.

By September, I think we can tell you what we can do short term
and what will take a little bit longer and what it depends on.

Ms. Richardson. I think also, Mr. Chairman, when you are visit-
ing the service center in Austin later this month, we will be able
to show you things we will be bringing online over the course of
the year and where they will lead us.

Chairman PiCKLE. You are able to take a lot of these forms filed
or kicked back by the computer. What bothers me is you only catch
the obvious, as I understand it, and when you get a stack every day
1 foot high, you don't know what to do with it.

Ms. Richardson. That is the significance of our contract with
Los Alamos. That is where they can truly help us with that stack
of information. They can help us detect patterns, analyze the data,
so we are very hopeful that they will be able to help us in that
front.

Chairman Pickle. In making these recommendations from my
standpoint, I am trying to see that the emphasis is put on elec-
tronic filing and how it affects the system. I think it would be a
mistake to say to the country what you are going to do to catch the
crooks.

I know from your testimony that you are going out there to make
these corrections, and I think we have a right to expect it, but I
also think if they are not corrected and corrected soon, we better
slow down the process, even having a freeze.

I hope our task force, the three studies you are going to make
would give us better insight and you tell us how you are not able
to catch these people and what can we in Congress do to improve
the situation. We are ready to do it, but we don't want to be kept
in the dark when you have a study that shows the situation is
worse than it is and we have to find out the hard way.

Let's work together and find a better answer to it and do it as
quickly as we can, because I think the whole system is at stake.
I will have a specific task force created and I want to work together
and I want this committee to be a part of the task force.

Ms. Stathis, I am going to ask that you give us a bundle of peo-
ple to help on the continued study of this program.

Ms. Stathis. I will go back and seek such resources, Mr. Chair-
man.

Chairman Pickle. I will not be bashful in our request.

We will conclude unless Mr. Houghton has other questions or
comments to make.

Mr. Houghton. No.

Maybe just one. You know I was supposed to go to a Social Secu-
rity hearing this morning and I didn't because I wanted to be here.
But it is the same issue — it is the drug addicts, the alcoholics who
milk the Social Security disability system.

We have talked here about people doing the same thing. It is sad
that this is happening, but it is happening. So the question to me
is not just the specific procedure or set of equipment, but it is an
attitude — not that again we want to be policemen totally, but we
have to change our attitudes toward what is going on out there be-
cause it is really tough on those people who try to be honest. You
know that they are surrounded by people who are taking tremen-
dous advantage of it.

I don't know what it is going to look like in 20 years, but it is
an attitudinal problem.

Ms. Richardson. One of the saddest things was a lot of people
were victimized by the people who testified this morning. I think
that is absolutely right.

Chairman Pickle. What we have heard from these two individ-
uals is happening all across the land. All known crime is not just
in Atlanta or Baltimore.

Ms. Richardson. Or at the IRS.

Chairman Pickle. We know that and better accept that fact and
go to work to try to correct it. I don't want to be an alarmist. I
want to be able to say we are correcting it.

I hope through your service centers and through the press we
can make people understand that if they do participate with a tax
preparer or a crook preparer or whatever you call it, they are going
to be held responsible and they might end up in jail, the same as
the preparer, and that is wrong. It is hurting the system.

I don't know how we can get that word out, but they ought to
know that Uncle Sam will come after them and catch them. It may
take more time than I think it should because you can't move fast
enough yet, but they will probably be caught.

I think we need to make that understood; otherwise the vol-
untary system is in big trouble. It is still the best system in the
world and we got to work fast in this area and that is why I want
the task force to continue.

Ms. Richardson. Thank you for your support and we look for-
ward to working with you to solve the problem.

Chairman Pickle. Thank you.

[Whereupon, at 12:50 p.m., the hearing was adjourned.]

[A submission for the record follows:]

STATEMENT SUBMITTED TO THE SUBCOMMITTEE ON

OVERSIGHT. COMMITTEE ON WAYS AND MEANS. U.S. HOUSE

OF REPRESENTATIVES. OUTLINING PRIVATE INDUSTRY EFFORTS

TO DETECT AND DETER TAX REFUND FRAUD IN CONNECTION WITH

ELECTRONICALLY FILED TAX RETURNS

Mr. Chairman and members of the Subcommittee, this statement
is submitted on behalf of the Electronic Filing Coalition, a
group of corporations and associations formed to help combat
fraud — through detection and prevention — associated with the
filing of individual tax returns. Among the members of the
coalition are HSR Block, the National Association of
Computerized Tax Processors, the four major financial
institutions engaged in Refund Anticipation Loans, i.e..
Bank One, Beneficial National Bank, Greenwood Trust and
Mellon Bank, and other entities involved with electronic
filing of tax returns.

Today's hearing affords us an important opportunity to
describe our industry's significant efforts to combat tax
refund fraud. As the Subcommittee noted in its release
announcing today's hearing, the problem of fraud
historically has been endemic to both paper and
electronically filed returns. In this regard, we would
emphasize at the outset our firm belief that the impetus to
commit tax fraud stems not from the availability of refund
anticipation loans, for example, but from the belief by some
that they can successfully defraud the tax system by
manipulation of the tax filing process through whatever
countless schemes the criminal mind can devise.

Attempts at fraud generally take two forms: (1) individuals
using false social security numbers (SSNs) or other
identification, and counterfeit W-2s and other ficticious
documentation and (2) taxpayers utilizing erroneous
information to enhance their refund claim or to claim
statutory credits to which they are not entitled, such as
the earned income credit (EIC) . Our industry, working with
the IRS, has been a potent force for preventing refund fraud
at the initial stage of the filing process. Our industry
has trained its employees to be aware of suspicious returns,
has put into place systems for verification of returns and
has implemented routine anti-fraud checks and safeguards.
As a result, it has become a powerful partner with the IRS
in preventing refund fraud in connection with electronic
filing.

The Internal Revenue Service has taken great steps in
deterring the first type of fraud mentioned above by
implementing the On-line Entity Check which validates
taxpayer names and social security numbers as part of the
electronic filing acceptance process. This process
virtually stops invalid names and social security numbers
used to defraud the system.

Some major initiatives undertaken by the industry for
preventing, detecting, and deterring tax filing fraud
include:

Creation and distribution by H&R Block and other
major tax preparers of videos to the Electronic Return
Originator (ERO) community to raise the awareness of
fraud.

Extensive training of tax preparers to identify
non-standard W-2s and to verify employment in the case
of non-standard forms.

Development and implementation by H&R Block and other
tax preparers of a comprehensive fraud prevention and
detection plan (see attached. Fraud Prevention 1994) .
This plan which focuses on deterring electronic filing
fraud before transmission of the return, establishes
controls used by tax preparers and return processing

personnel. Controls utilized by the tax preparers
include:

Screening taxpayers eligible for an
EIC to determine if they filed a
return the previous year and, in
accordance with criteria established
by the lending banks, denying credit
to those who do not meet the
criteria.

Stringently examining W-2s and
identifying those that are
determined to be non-standard.

Verifying the accuracy of FICA and
Medicare withholding accounts.

Denying credit, in accordance with
criteria established by the lending
banks, to taxpayers whose only
income is from Schedule C.

Requiring a copy of a birth
certificate for a child age one or
older listed on Schedule EIC if such
has been used in lieu of the SSN.

* Establishment of return processing procedures to verify
employment on suspect fraud returns and, when
applicable, contacting the Criminal Investigation
Division (CID) of the IRS.

* Creation and implementation of sophisticated
diagonostics built into electronic filing software in
order to identify criteria that would exclude loan
eligibility as well as to alert return processing
personnel to conflicting information that may flag
potential fraud. An example includes the ability of the
diagnostics to compare W-2 withholding with gross wages
to determine whether the withholding is reasonable for
the amount of wages.

* Creation of the Fraud Service Bureau (FSB) to review tax
return data. This industry-wide cooperative effort
links all major lenders and electronic return
transmitters, which allows them to compare and
cross-check data to verify valid loan applications and
identify suspect applications regardless of which lender
receives the application.

* Employment by the FSB of sophisticated fraud detection
systems, including the use of statistically based and
neural network technology, to create various
"scorecards" based upon tax return data which key in on
fraudulent refund characteristics.

* Prompt referral of suspected fraudulent returns to the
Criminal Investigation Division at the IRS Service
Centers.

* Thorough screening and background checks of
participating EROs by major lenders.

* Full cooperation with law enforcement in responding to
subpoenas and appearing as witnesses in prosecutions for
electronic filing refund fraud.

Our industry's strategy is to work closely with the IRS and
CID in the development of an ever-evolving, comprehensive
program to combat tax filing fraud. The IRS and CID are
precluded from sharing their internal anti-fraud strategies
with the private sector. All information developed by the
industry is treated as confidential in accordance with
current law. Consistent with these confidentiality
safeguards, our industry's mission is to develop and
implement manual and electronic procedures that will deter

and detect fraud while promoting the advancement of
electronic filing of tax returns in support of the stated
goals of the Congress and the IRS.

Members of our coalition continue to develop and implement a
series of "up-front" chec)cs that screen taxpayer data to
determine the likelihood of electronic filing fraud. These
screenings focus primarily upon verification of the W-2 and
tax return information. When evidence is found that a
fraudulent scheme is in progress, procedures have been put
in place to report the information to the CID as
expeditiously as possible. The industry views a close and
efficient working relationship with the IRS and CID as a key
to success in stopping electronic filing fraud.

While an up-front check of tax returns represents an
important first layer of screening for suspect
electronically filed tax returns, an equally important
second layer of screening is provided through manual and
computerized checks of the Fraud Service Bureau FSB created
in the fall of 1992 through the joint effort of our
industry's four major banks. The FSB is in its second year
of operation. It uses various scoring methodologies to
screen all the electronically filed tax returns accompanied
by loan applications (more than 9 million tax returns during
1993 alone) .

The FSB process requires all electronic filers associated
with our major lenders to send to the FSB all loan-related
tax returns at the same time they send those returns to the
IRS. It is important to note that these tax returns reach
the FSB before the IRS acknowledges a return and authorizes
direct deposit of the taxpayer's refund. It is a primary
mission of the FSB to get the scored suspect fraud record to
the lender during the loan approval process so that it can
be considered prior to approval of the loan application by
the RAL bank.

In addition to the FSB's ability to process high volumes of
data rapidly, it employs both statistical and neural-based
scoring modules that identify typical patterns of data on
tax returns associated with prior fraudulent schemes. These
modules are re-trained and re-engineered each tax season,
updating them with any new fraud patterns that have
surfaced. The FSB gathers its fraud information through
industry experience and subpoenas issued to our lenders for
specific taxpayer data required to aid in a fraud
investigation. The actual SSN or identity of a taxpayer is
never used in the scoring development. However, certain
characteristics and attributes of the actual tax return are
used in the scoring process as permitted by law.

Once electronically analyzed, the emerging patterns are
scored accordingly and a distribution table of scores is
produced. Each lender reviews the tables and sets its own
scoring threshold for a suspect loan denial. Typically, our
lenders have been denying up to one percent or more of their
loan applications as suspect fraud. Each lender has
procedures allowing a loan applicant to call an "800" number
and discuss a denial. In many cases a loan applicant can
provide sufficient information to refute the denial and in
such event an approval of the loan application is issued.

If an applicant for a denied loan does not call the lender
within five days to refute the loan denial, lenders
transmit those filers' SSNs to the appropriate IRS Service
Center for further investigation (over 13,000 such SSNs were
forwarded to the IRS during the 1993 tax season) . Our
lenders understand that an honest loan applicant simply may
not bother to refute a loan application denial. However, as
cited in the December 1993 General Accounting Office
(GAO) report assessing the IRS's 1993 filing season
performance, the information provided by our industry helped
CID Fraud Detection Teams identify fraudulent refunds.

The same GAO report pointed out that our industry often took
too long to develop and transmit information to the IRS. In
response, our lenders in the 1994 season have cut the

reporting time to the IRS from 10 days to 5 days. Last year
the data was batched and transmitted to the IRS on a weekly
basis. This year, files are transmitted daily. As a
result, the IRS receiyes all information on the evening of
the 5th day! In addition, a new file of SSNs containing
duplicate (previously filed) SSNs identified by the FSB is
being transmitted to the CID in an effort to further assist
in identifying suspect fraud situations. The value of this
new procedure to both our industry and IRS is as follows:

The FSB stores an identification record for all primary,
spouse, and dependent social security numbers on its
database. When a return comes in with a previously
received SSN, the application is immediately flagged and
further inquiries are begun. The system checks to see
if the current and previous return were received from
the same return originator and the same transmitter. If
they have, the SSN is judged to be a correction and the
duplicate flag is lifted. If these conditions are not
present, the SSN is deemed a duplicate. A file of this
information is prepared for same-day transmission to the
IRS. Processing for the four major lenders, the FSB
receives loan-related tax returns transmitted to all
five IRS service centers and is able to check SSNs
across each of them. The file sent to IRS contains the
duplicate SSN, primary SSN, dependent SSN, and a code
indicating the type of duplicate found, i.e., "dup
prime, dup spouse, dup dependent." The IRS is then able
to investigate the basis for duplication before a refund
is issued.

The FSB is operated by Beneficial Data Processing
Corporation in Peapack, N.J. To date, the development
investment by our industry's members is over $3 million in
direct FSB expenses attributable to hardware, software and
maintenance. Another $1 million is spent annually by each
member to cover travel, meetings, high level resource
involvement, system testing and the individual member's own
fraud investigation department's handling of the thousands
of calls made daily. The FSB maintains electronic links to
16 electronic filing transmitters (the largest being
CompuServe) and our four major lenders. In 1993, the FSB
processed over 9 million loan-related tax returns through
its facilities, representing roughly 73% of all tax returns
filed electronically.

Based on recent 1993 IRS statistics, the percentage of fraud
attempts involving loan applications has decreased
significantly from 1992 to 1993. We believe this
significant verification was a result of the IRS On-line
Entity Check (name and SSN validation process) and the
industry's aggressive efforts. In fact, for tax season
1993, there were a comparatively small number of loans
subsequently determined to be fraudulent.

These facts lead to the conclusion that the screening
methods, including the FSB, now applied by the industry are
working well. Nevertheless, the FSB is but a part of a
larger process dedicated to identifying and deterring filing
fraud. Our industry's front-end vigilance, ongoing
IRS/ industry dialogue on fraud prevention, the IRS's own
internal fraud procedures, CID's follow-up and each lender's
own fraud investigation teams have played an important part
in the intense focus on this problem. We believe that the
electronic filing fraud identified in tax season 1993
establishes the benchmark and that the fraud problem is
being addressed.

During the last four years alone, well over 35 million
taxpayers have filed their returns electronically and been
issued loans. The enormous customer demand for electronic
filing accompanied with a loan is clear. Historically,
since the inception of the program in 1987, approximately
9(X% of all electronic filers also have requested a loan.
Significantly, seventy-five percent of electronic filing
borrowers surveyed have indicated that if they could not
obtain a loan with their electronically filed tax return,
they would not have filed electronically.* The ongoing

challenge of our industry will be to foster future growth of
electronic filing and, at the same time, to continue the
deployment of sufficient resources to maximize the reduction
of fraud-related losses. Tax season 1994 is only the second
year of such an undertaking and to date the results are
promising. The efficiencies and resulting tens of millions
of tax dollars saved by the U.S. Treasury because of
electronic filing are already significant. We firmly
believe that the collective efforts of the industry and
government will be successful in substantially reducing tax
filing fraud as the IRS pursues its goal of 80 million
electronically filed tax returns annually by the year 2000.

2/10/94

♦Copies of a Roper Survey completed in 1993 involving 500
randomly selected borrowers are available upon reguest.
Inquiries should be directed to Mr. Gary J. Perkinson,
Electronic Filing Coalition, 453 New Jersey Avenue, S.E.
Washington, D.C. 20003. Tel. 202-646-1260

77
Fraud Prevention Tax Season 1994

FRAUD PREVENTION
OVERVIEW

Tax fraud is not new. The concept of trying to "beat the government" by filing
fraudulent returns has been around since 1913, when income tax systems as we
know it today was first introduced.

However, the introduction of electronic filing in 1986 and the refund anticipation loan
in 1988, opened new and faster avenues for dishonest taxpayers to defraud the
government. Over the past three filing seasons, tax fraud perpetrators have targeted
H&R Block offices in various parts of the country as sites for their illegal activities.

During the 1993 tax season, H&R Block and the RAL banks joined forces in an effort
to prevent electronic filing fraud. An additional goal was to demonstrate to the IRS
that fraudulent retums could be detected before transmission to the IRS in hopes that
the IRS would reinstate the direct deposit indicator (commonly know as the "flip"
indicator) transmitted as part of the acknowledgement file for electronically filed
returns.

Although we were successful in meeting our goals, we must all continue to be diligent
in our efforts to control and prevent electronic filing fraud. If fraud gets out of hand
again and escalates significantly, the IRS could (and no doubt would) eliminate the
"flip" indicator - there would not likely be a second chance.

Based on our continuing concem, we will maintain our action plan to help combat and
prevent the filing of fraudulent tax returns. The RAL banks will also continue to
operate their fraud detection system. In addition, the IRS has put into place several
new fraud prevention safeguards.

H&R BLOCK PLAN

Block's plan is focused in the Quality Control Center, rather than the front office. In
addition, the RAL banks have agreed to incorporate several of the items into their
criteria for granting refund anticipation loans. While some of the items explained
below have some tax office procedures associated with them, these are being
presented to preparers as new bank requirements associated with the RAL. It is

important to remember that the filing of fraudulent returns is not to become an issue
in the front office. The tax return preparer should never be placed in the position of
confronting clients. If a retum does not meet the eligibility requirements for a RAL,
the preparer will simply tell the client that his or her situation will not meet bank
requirements.

#1 - A RAL will not be granted to any taxpayer who is eligible for EIC if the primary
taxpayer did not file a retum the previous year.

Tax Office Procedures: This requirement has been incorporated by the banks into
the Refund Anticipation Loan application. When either a military ID or a Social
Security card is presented to validate the primary taxpayer's name and SSN (line 2
of the application), the preparer will ask if he or she filed a 1992 retum and check the
applicable line 2 box. The preparer will also check the yes or no box that indicates
whether the taxpayer is eligible for EIC. For all retums containing Form 8453 and
Schedule EIC, TPS will issue a warning diagnostic reminding the preparer that if a
RAL was requested, the primary taxpayer must have filed a 1992 return.

Quality Control Center Procedures:

* All RAL retums for which either the military ID or a social security card was
used for the line 2 SSN validation and which contain Schedule EIC will be
status 3 retums in Rapid Refund edit.

* The Rapid Refund checker will issue a waming message stating, "Military or
SSN ID. Check paper loan app to be sure TP qualifies for RAL."

* On all retums on which the waming message is issued, the editor will review
the paper copy of the loan application to make sure that the questions
regarding filing a 1992 retum and EIC eligibility have been answered and that
the taxpayer does qualify for a RAL.

* If the questions regarding last year's return have not been answered, the
retum is to be sent back to the preparer so that he/she can contact the client
for the infomnation to property complete the application.

* If the answer to the quesfion regarding last year's retum has been answered
no, the retum is to be sent back to the preparer so that he/she can contact the
client, explain that the return is not eligible for a RAL, and offer one of the
other electronic filing options

#2 - All W-2s will be subjected to a stringent review process. All electronically filed
returns containing a non-standard W-2 will be carefully reviewed in the Quality

Control Center. The PICA and Medicare withholding amounts will be verified for
accuracy on all W-2s.

Tax Office Procedures: The IRS requires that we will identify non-standard W-2s
on all electronically filed returns. On all returns prepared using TPS, preparers have
been instructed to answer no to the standard W-2 question on the W-2 screen if any
of the following apply.

* The infonnation on the W-2 is handwritten.

* The form is a substitute W-2 (including one prepared by H&R Block).

* The fomri appears to have been typewritten rather than computer generated.
(Note: stress to preparers that they should not spend time scrutinizing W-2s
to detemriine whether they are typewritten vs. computer generated.
Indications that W-2 is typewritten included strike-outs, typeovers, crooked
lines, erasures, etc.)

* The W-2 form has been altered or changed in any way.

In addition, the preparer is to check the non-standard W-2 item on the Blue Ribbon
fomi and attach it to the outside of client envelope.

If Express Filer retums are being entered directly into the Rapid Refund program in
the tax office, the individual entering the infonnation will be required to indicate the
W-2 type (S=standard, N=non-standard) on the Form W-2 screen.

The TPS program will alert preparers if FICA and/or Medicare withholding amounts
do not equal (within a $5.00 tolerance) the applicable percentage of the FICA and
Medicare wages.

Quality Control Center Procedures:

* For all Express Filer retums entered into the Rapid Refund program in Quality
Control, the input operator will be required to indicate the W-2 type
(S=standard; N=standard) on the Fonn W-2 screen.

* All retums containing one or more W-2s coded non-standard, will be Status
3 retums. Checker will issue a warning message alerting the editor to
carefully review the Fornn W-2 to see if it appears to be fraudulent.

* When it is suspected that a W-2 is fraudulent, follow one of the procedures
listed below, whichever seems applicable to the situation:

1 - A designated individual in quality control will call the client, explain that the
Form W-2 contains an in^egularity, and that it will be necessary for us to
contact the employer to clear up the discrepancy. Obtain the employer's
phone number and the supervisor's name. For local employers, before calling
the number given by the client, check the phone book listing for the company
name to validate the phone number provided by the client is not fictitious.

When contacting the employer, the Block associate should identify him or her
self as being with H&R Block and explain that we have the employee's
permission to verify employment.

If the employment can be verified, transmit the retum in usual manner.

If the employment cannot be verified, PUT THE RETURN ON HOLD USING
REASON CODE 5 (OTHER) - THEN TRANSMIT IT TO THE VAX. Follow the
procedures for sending Pat Nelson letter (#6 below), or

2 - Send the client a copy of the Pat Nelson letter (samples of this letter and
procedures for its use may be found later in this chapter.)

#3 - A RAL will not be granted to any taxpayer whose only income is from Schedule
C.

Tax Office Procedures: This requirement has been incorporated into the refund
anticipation loan application. A client whose only income is from Schedule C is not
eligible for a RAL. The TPS program will issue a severe diagnostic to this effect,
when applicable, and the client should be offered one of our other electronic filing
options.

Quality Control Center Procedures: Returns on which the only income is from
Schedule C will be Status 2 retums. If this is the case, the retum should be sent back
to the preparer so that the client can be notified that the return does not qualify for a
RAL and offered one of our other electronic filing options.

#4 - For taxpayers who are eligible for BIG and who are first time users of H&R
Block's electronic filing system, a software program will be used to validate the SSN
of the qualifying child(ren) if a RAL has been requested. Proof of the SSN will be
required if the SSN appears to be invalid.

Tax Office Procedures: Tax office procedures will be implemented only if the retum
is sent back from Quality Control because of an invalid SSN. In this case, the
preparer is to contact the client, explain that the SSN appears to be invalid, and
request proof of the SSN. If the number cannot be validated, a RAL will not be

granted. One of the other electronic filing products should be offered to the client.

Quality Control Procedures: The Rapid Refund checker will validate the SSN
range for all social security numbers (including dependents) present on the return.

* A return containing an invalid SSN will be a status 2 return. Return it to the
preparer who will contact the client and verify the accuracy of a number.

#5 - If a RAL is requested, EIC is present on the return, and Applied has been used
in lieu of the SSN for a child age 1 or older listed on Schedule EIC, the banks require
that the client must bring in a copy of the birth certificate for the preparer to see in
order to validate the existence of the chiW.

Tax Office Procedures: If this condition exists, the preparer will explain verification
of the child's existence is a requirement of the bank. If a birth certificate cannot be
provided, the client is not eligible for a RAL. In this case, one of the other electronic
filing options should be offered.

Quality Control Procedures: None. If Applied has been used in lieu of an SSN, it
is to be assumed the prepared followed the required procedure.

#6 - If fraud is suspected or detected, the client will be sent a Pat Nelson letter.

NOTE: Each district shoukj designate one or more individuals to respond to the "Pat
Nelson" calls.

Tax Office Procedures: Preparers and receptionists should be informed that there
may be times when a client will receive a Pat Nelson letter in lieu of his or her check.
When this occurs, the Block associate should explain that he or she has no
information regarding the situation and that the client will have to call the phone
number on the letter for infonnation about the status of his or her return.

Quality Control Procedures: When fraud is suspected or detected on a return; PUT
THE RETURN ON HOLD USING REASON CODE 05 (OTHER) - THEN TRANSIVIIT
IT TO THE VAX.

Follow the procedures outlined below.

* In company-owned locations, notify the quality control supervisor that what
appears to be a fraudulent retum has been detected. This individual should,
in turn, notify the district manager, who will then notify the regional director.

* Satellite owners will notify their satellite director who will then notify the
regional director of the situation.

* Mail a copy of the Pat Nelson letter to the client. Two versions of the letter are
at the end of this chapter. Send the one that seems more applicable to the
situation.

* Put a duplicate copy of the Pat Nelson letter in a client envelope and send It
to the front office. This will be given to the client when he or she comes in to
pick up the check.

* If the client calls in response to having received the Pat Nelson letter, reiterate
that there is a problem with the W-2.

Ask the taxpayer to verify the following information:

* Street address, city, and ZIP

* Phone number, including area code

* Primary (and spouse, if applicable) social security number

* Children's names and SSNs

* Employer's name and phone number and supervisor's name

When verifying this information, DO NOT read the infomiation on the return and W-2s
to the client. Instead, say, "I need to verify some information on your retum. What
is your complete address?" Repeat this procedure with each of the items listed
above.

Unfortunately, there are no hard and fast rules for making a decision as to whether
the retum is fraudulent or not. it is often a judgement call based on subjective
Actors. For example, if the client cannot give you the infomnation requested without
getting his copy of the retum, or gives you information completely different from that
appearing on the retum, there is a good chance that you may dealing with a fraud
situation.

If you are unable to verify, beyond a shadow of doubt, the client's employment, PUT
THE RETURN ON HOLD USING REASON CODE 05 (OTHER) - THEN TRANSMIT
IT TO THE VAX. in this case, explain to the client that because of the discrepancies
that exist, the retum cannot be filed electronically.

* if there is no response from a taxpayer to whom a Pat Nelson letter was sent
within 10 days, you should contact the CiD regarding the situation. Before
contacting the CID, be sure to follow the chain of communications described

on page 7.

#7 - The Rapid Refund checker will compare W-2 withholding with gross wages to
determine whether the withholding amount is "reasonable" for the amount of wages.

Tax Office Procedures: None

Quality Control Center Procedures: Returns on which the W-2 withholding is
outside of the system tolerance will be Status 3 returns.

* Editors will carefully review the W-2 form.

* When it is suspected that a W-2 is fraudulent, follow one of the procedures
listed below, whichever seems applicable to the situation:

1 - A designated individual in quality control will call the client, explain that the
Form W-2 contains an irregularity, and that it will be necessary for us to
contact the employer to dear up the discrepancy. Obtain the employer's
phone number and the supervisor's name. For local employers, before calling
the number given by the dient, check the phone book listing for the company
name to validate that the phone numt}er provkled by the client is not fictitious.

When contacting the employer, the Bkxk associate should identify him or her
self as being with H&R Bk>ck and explain that we have the employee's
permission to verify employment

If the employment can be verified, transmit the return in the usual manner. If
the employment cannot be verified, PUT THE RETURN ON HOLD USING
REASON CODE 05 (OTHER) - THEN TRANSMIT IT TO THE VAX. Follow
the procedures for sending the Pat Nelson letter (#6 above), or

2 - Send the client a copy of the Pat Nelson letter using the procedures
explained in #6 above.

#8 - Conduct a check that verifies that the dienf s area code is compatible with the
ZIP code, and/or the first three digits of ttie phone numbers are compatible with the
area code.

These checks will be routinely performed by the banks on all RAL returns.
The RAL may be denied If either of criteria listed above is not met. More
information on bank fraud detection plan is presented later in this material.

THE BANK FRAUD DETECTION SYSTEM

The banks will also have a fraud detection system in place during the upcoming tax
season. At the same time that the RAL return is being transmitted to IRS, it will also
be transmitted to the bank's Fraud Service Bureau (FSB) where various elements
contained on it will be scored based on known fraud criteria. It will be run through a
credit risk scoring system, including a cross check with all RAL banks for prior bad
debt. A RAL will be denied if the return does not pass successfully through the Bank
Fraud Detection System.

Quality Control Center Procedures:

* RALs denied for this reason display on the Loans Denied Report with a bank
reject Status Code of 11-04 - Denial is due to condition indicating possible
fraud.

* Complete the Loan Reconsideration Request - Code 11-04, verify the
taxpayer's employment, and fax the reconsideration request to the RAL bank.

* If the employment cannot be verified or the bank denies the reconsideration
request, contact the client and explain that the bank has denied the Refund
Anticipation Loan request because of discrepancies on the return. Also, send
the client a copy of the bank loan denial letter.

Tax Office Procedures: There may be occasions when a client whose loan has
been denied because of possible fraud conditions has not been contacted by quality
control. In this situation, if a copy of the Client Status Report is available in the tax
office for preparer and receptionist use, instruct them not to tell the client the reason
for the denial but to simply say that the bank has denied the refund anticipation loan
request because of discrepancies on the return and that the client will have to contact
the bank for more information.

Returns Transmitted for EROs

Block's Fraud Prevention Action Plan procedures do not apply to retums transmitted
for EROs. EROs are responsible for adhering to the bank requirements. Therefore,
the checks in the Rapid Refund checker program will not apply to ERO returns.

IRS FRAUD PREVENTION PROGRAM

The IRS has instituted many new checks and balances into their system to detect
fraudulent returns that have been filed electronically. Beginning this year, the IRS
will:

* Deny a direct deposit to first-time filers. Refunds for these individuals will be

paid by paper check. A first-time filer is one who has not, at any time during
the past 10 years, filed as a primary taxpayer. Details about the preparer's
responsibility are discussed in the Tax Office Procedures Handbook.

Check the date the SSN was issued with the date of birth for dependents
listed on Schedule EIC to validate that ttie numt)er was issued in a time frame
consistent with the birth date.

Validate the EIN on Form W-2.

* Preform validation checks on the spouse's SSN.

* Suspend from the electronic filing program any ERO who misuses the W-2
. Standard/Nonstandard indk:ator.

COMMUNICATIONS

It is extremely important to keep all levels of fiekj management informed and aware
when fraudulent retums are suspected or detected. Call the regional director before
contacting the CIO.

The following chart illustrates the communication steps to be followed before the CID
is contacted.

1 Position

Contacts

Quality Control Center

Quality Control Supervisor

Distikrt Manager

District Manager

Regional Manager

Satellite Owner

Satellite Director

Regnnal Director

Questions about fraud, fraud prevention procedures, and contacts by CID should be
directed to your regional director or to one of the fbik>wing individuals at Home Office:
Rusty Wallower (Ext. 230), Judy Keisling (Ext 430). or Eddie Feinstein (Ext. 451).

DEALING WITH THE CID

As a general rule, the Criminal Investigation Division of the IRS (CID) should be
contacted only when a pattern of fraud is identified. For example, if fraud is

suspected on only one return, you generally would not contact the CID. You should,
however, follow the communication steps above so that the regional director is aware
of the situation. Perpetrators of electronic filing fraud often target several locations
within an area, filing only one or two fraudulent retums in each location. By notifying
the regional director about every retum that appears fraudulent, he or she will be able
to determine whether there is a fraud scheme operating within the region.

On the other hand, if several retums come through the QC center with similar
characteristics; e.g., W-2s appear to be nonstandard or fraudulent, taxpayer uses
head of household filing status, the EIC is claimed, and the income amounts are
similar, the CID should be notified. A listing of the CID Hotline numbers may be
found at the end of this chapter.

After contacting the regional director, use the following procedures when you contact
the CID:

* Allow the agent to review the returnt in question.

* If the agent requests to remove the records from the office, you may make and
release a copy of the tax return infonmation, including Fomi 8453, the tax retum, and
Fomis W-2. The originals of any document may not be released unless you receive
a summons or subpoena.

Use the following procedures if you are contacted by the CID:

* Contact Rusty Wallower at Home Office (Ext. 230) and give him details about
the situation. Also, contact your regional director.

* Do not open your office to a CID agent to go on a "fishing expedition" looking
through all the records that exist in the office.

* If the agent is looking for a particular retum and knows the name of the
taxpayer, comply with the request to see the records.

* If the agent requests to remove the records from the office, you may make and
release a copy of the tax retum infomiation, including Fomri 8453, the tax
retum, and Fomris W-2. The originals of any documents may not be released
unless you have a summons or subpoena.

If you receive a summons or subpoena from the CID, contact the legal department
at the Home Office for assistance.

SUSPECT FRAUD REPORTS

Home Office will be tracking certain infonnation related to returns that are suspected
or detected to be fraudulent. The Fraud Suspect Return Report on 10 has been
developed for this purpose.

Completing the Report

Each company-owned district should make a sufficient number of copies of the report
for their use during the tax season. The reports will be maintained in the Quality
Control Center. All applicable information on the report should be completed for each
taxpayer to whom a Pat Nelson letter is sent and for each return which H&R Block
generates a call to the CID.

Record the taxpayer's SSN in column a and the last name in column b.

For tfie Pat Nelson letter, record the date the letter was sent in column c. If, after
talking to the client and determining that the retum is not fraudulent, record the date
the retum is transmitted to the IRS in column d. If a check is printed and/or
distributed to the client, record the applicable dates in columns e and f.

For CID Contacts, record the date the Initial contact with CID was made in column
g. In column h record the date the CID responds to the call. If copies of the tax
return are released to CID, record that date in column i. Information should not be
recorded if subsequent calls are made on retum already recorded.

Examples of correct recording are described below:

Situation 1: Pat Nelson letter sent. Retum transmitted, check printed and
distributed after client called.

Complete columns a through f.

Situation 2: Pat Nelson letter sent. Taxpayer did not respond. CID contacted but
has not responded.

Complete columns a through c, and g.

Situation 3: No Pat Nelson letter sent, but CID contacted. Copies of retum given
to CID after their response.

Complete columns a and b and g and i.

A separate reporting form (of group reporting forms) should be kept for each reporting
period, as discussed below. The reporting period is the same period as for volume
reports.

Reporting Requirements

Company-owned locations will report the total number of entries in columns c, d,
e, f, g, h, i for each reporting period to the regional office each time the volume report
is called in. The infonnation will be consolidated at the region level and sent to Home
Office.

Franchise Locations. While we encourage all franchises to participate in recording
and reporting suspected or detected fraudulent retums, participation is on a voluntary
basis.

The reporting periods for franchises are as follows: January 1 5 through February 28,
March 1 through March 31, and April 1 through April 16.

Franchises who chose to participate should send a recap of their column totals to
their satellite directors on March 1, April 1, and April 17.

Satellite Directors will consolidate all totals from their franchises and forward the
results to the regional. The regional comptroller will consolidate the results for all
franchises in the region and MAIL a copy of the consolidated report to Home Office,
Attention: Judy Keisling, by March 10, April 10, and April 30.

Conclusion

The H&R Block Fraud Prevention Action Plan primarily focuses on two elements of
the tax return -fraudulent W-2s and retums on which EIC is claimed. Our
experience, and that of the IRS, has shown that the majority of fraudulent
electronically filed returns contain one or both of these elements.

Members of the Tax Operation team at Corporate are very much aware that dealing
with the issue of fraud is not a pleasant one - yet it is an issue that all of us must
confront and deal with. We are also aware that some honest taxpayers may be
denied a PAL because of the more stringent qualification criteria. We believe that the
number of honest taxpayers affected will be small, and believe that making
exceptions to our general rules would jeopardize the integrity of a program that we
believe will be a strong detriment to perpetrators of electronic filing fraud.

In Tom Block's wori<s, our goal is not to become law enforcement officers. Our goal
is to protect our honest clients' right to a quick refund.

Fraud Prevention

Tax Season 1994

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Fraud Prevention Tax Season 1994

H&R BLOCK

Date

John Q. Taxpayer
Stree: Address
City, State, Zip

Dear Mr. Taxpayer:

SSN:

We have experienced difficulty in electronically transmitting your 1993 tax return to the Internal
Revenue Service. It appears that your 1993 W-2s contain one or more irregularities.

Please call me at ^Block Phone Number) to have your W-2s validated.

DO NOT contact the office where you had your return prepared; the office no longer has the

infcrniation regarding your return.

Sinci.-w-iv.

Pat Nelson

Customer Ser%'ice Representative

H&R Block

Fraud Prevendon Tax Season 1994

H&R BLOCK

Date

John Q. Taxpayer
Street Address
City, State, Zip

Dear Mr. Taxpayer:

SSN:

We have experienced difficulty in electronically transmitting your 1993 tax renjrn to the Internal
Revenue Service. It appears that your 1993 W-2s contain one or more irregularities.

You will need to call the Criminal Investigation Division of the Internal Revenue Service to have
your W-2s validated. The telephone number in Citv Name of Closest CID Lx>cation'> is_
(CID Phone Number at Location Named^ .

If you prefer, you may call me at (Block Phone Number to be Called") .

DO NOT contact the office where you had your remm prepared: the office no longer has the
information regarding your return.

Sincerely,

Pat Nelson

Customer Service Representative

Fraud Prevention

Tax Season 1994

CRIMINAL INVESTIGATION HOTLINE NUMBERS
FOR REPORTING SUSPICIOUS ELECTRONIC FILING TRANSACTIONS

District

Aberdeen, SD
Albuquerque, NM
Anchorage, AK
Atlanu, GA
Augusta, ME
Austin, TX
Austin, TX
Austin, TX
Baltimore, MD
Baltimore, MD
Birmingham. AL
Boise, ID
Boston. MA
Brooklyn, NY
Buffalo. NY
Buffalo, NY
Buffalo, NY
Buffalo, NY
Burlington, VT
Cheyenne, WY
Chicago, IL
Chicago, IL
Chicago, IL
Cincinnati, OH
Cleveland, OH
Columbia, SC
Dallas, TX
Dallas, TX
DaUas, TX
DaUas. TX
Denver, CO
Denver, CO
Des Moines, lA
Des Moines, lA
Detroit, MI
Fargo, ND
Ft. Lauderdale, FL
Greensboro, NC
Hartford, CT
Helena, MT
Honolulu, HI
Houston, TX
Houston, TX
Houston, TX
Indianapolis, IN
Jackson, MS
Jackson, MS
Jackson, MS
Jackson, MS
Jacksonville. FL
Laguna Nigue!. C.\
Lacuna Nicuei. C.-\

Contact

Greg Pasco
(daytime)
Jeff WiUen
Patsy Tittle
Bill Kiely
(daytime)
Buddy Adams
.Michael Grubich
Paul Czamecki
June Mattson
Joanne Rinks
Steve Mines
Paul Donnelly
Cathy Sleckman
Roben Newell
Frank Perez
Gerald Bradley
Jeff Derx
Joe Cross
(daytime)
George Johnson
Mark Cohen
(24 hours)
Re22ie McDaniel
Ed'Salak
Patsy Tittle
(24 hours)
(daytime)
Darin Wiewel
Vernon Hampton
(daytime)
Steve Vickers
Mary Morlan
Marsha Griffith
Joe Ellcry
Gary Keller
Patsy Tittle
Joanne Rinks
Rodney Clark
Loretta Rodriquez
Malia Beth Dougan
(daytime)
Darryl Smith
Ronald Eatingcr
Jan Wigand
Jackie Collins
Sarah Davison
Jose Marrero
Joanne Rinks
Patsy Tittle
Maurice Aouaii
'24 hours-

Phone

605-226-7221
800-829-2872
907-271-6245
404-454-1713
207-622-8316
800-829-2872
512-499-5261
512-499-5206
215-969-2405
215-969-2373
901-365-5181
208-334- lOCO
508-559-5200
516-366-6458
716-846-5525
716-263-3137
518-472-6073
315-423-5026
802-860-2016
800-829-2372
312-886-4553
312-886-4538
312-886-4519
513-684-2333
216-522-3240
404-454-1713
214-767-1076
800-829-2872
817-334-3381
817-334-3381
800-829-2872
303-446-1810
515-284-8180
319-328-2650
313-226-7262
701-239-5143
404-454-1713
901-365-5181
203-845-3377
406-657-6045
808-541-1150
800-829-2872
713-878-5888
713-653-3620
317-573-5711
601-965-5099
601-965-5099
601-965-5087
901-365-5181
404-454-1713
:U-645--721
714-836-2872

Beeper/Other

512-480-4286
800-999-6710

208-384-2593

Buffalo
Rochester
Albany
Syracuse

312-308-3720

116-273-2193

214-804-1694
214-804-1642

71^-587-7060

Fraud Prevention

Tax Season 1994

District

Las Vegas, NV
Las Vegas. NV
Las Vegas. NV
Little Rock, AR
Los Angeles, CA
Los Angeles, CA
Los Angeles, CA
Louisville. KY
Manhattan, NY
Milwaukee. WI
Nashville, TN
New Orleans, L-^
Newark. NJ
Oklahoma Cit>', OK
Oklahoma Cit>'. OK
Oklahoma Citv. OK
Omaha, NE
Parkersburg, WV
Philadelphia. PA
Philadelphia, PA
Phoenix, AZ
Phoenix, AZ
Phoenix. AZ
Pittsburgh, PA
Pittsburgh. PA
Portland. OR
Portland. OR
Ponsmouth. NH
Providence, RI
Reno, NV
Richmond, VA
Richmond, VA
Sacramento, CA
Sacramento, CA
Salt Lake City, UT
San Diego, CA
San Francisco, CA
San Francisco, CA
San Francisco, CA
San Jose, CA
San Jose, CA
Seattle, WA
SeatUe, WA
Springfield, IL
St. Louis, MO
St. Paul. MN
Wichita. KS
Wichita. KS
Wichiu. KS
Wilmington. DE
Wilmington. DE

Contact

Steve McCullough
Greg Brent
(24 hours)
Joanne Rinks
Debra King
Anthony Ruckstuhl
(24 hours)
Harold Calhoun
Cliristinc Mazzella
Tom Waltz
Joanne Rinks
Joanne Rinks
Ray Hopkins
(daytime)
Lam' Gamer
Henry Maldonado
John Nunci
Barbara Nelson
Paul Czamccki
June Matison
(daytime)
Debbie Dotson
Francis Turner
Paul Czamccki
June .Macison
Matthc'.v Dougiieny
f24 hours)
William Simoneau
William Siiarkcy
Greg Brent
Pauf Czamecki
June Maiison
Charles Philips
Jack McMenimen
Rebecca Romero
Maurice Aqustc
Tammy Wiiliams
Jim Carpenter
(24 hours)
Clarissa Coate
Bridget Marchetia
Stanley E. Linn
Dan Barnes
Debbie Alexander
Kathleen Burke
Gerald Bucksa
(daytime)
Richard Whitburn
Linda Fcucrbom
Paul Czamecki
June Mattson

Phone

702-455-1105
702-784-7001
702-251-2899
901-365-5181
213-894-4156
818-904-6271
213-894-4151
502-582-5012
212-264-0794
414-297-3916
901-365-5181
901-365-5181
201-357^017
S00-S29-2872
918-581-7050
405-297-4700
402-221-3596
304-347-5923
215-969-2405
215-969-2373
800-829-2872
602-207-8999
602-207-8902
215-969-2405
215-969-2373
503-326-3203
503-326-3201
603-433-0561
401-823-1796
702-784-7001
215-969-2405
215-969-2373
415-479-8424
415-479-8424
801-524-5990
619-557-6100
510-637-2674
510-637-2674
415-556-0779
408-291-7786
408-291-7786
206-220-5852
206-220-5852
618-482-9254
314-425-3147
612-373-5137
800-829-2872
316-291-6680
915-739-1170
215-969-2405
215-969-2373

Beeper/Other

Reno. NV

213-991-5524
213-525-6443

502-478-9743

918-748-2758

602-239-8475
602-239-8110

612-530-5967

77-603 (100)

BOSTON PUBLIC LIBRARY

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ISBN 0-16-044068-8

90000

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Full text of "IRS filing systems vulnerable to tax refund fraud : hearing before the Subcommittee on Oversight of the Committee on Ways and Means, House of Representatives, One Hundred Third Congress, second session, February 10, 1994"

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