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MSP #4: REVENUE PROTECTION

Hundreds of Thousands of Taxpayers File Legitimate Tax Returns That Are Incorrectly Flagged and Experience Substantial Delays in Receiving Their Refunds Because of an Increasing Rate of “False Positives” Within the IRS’s Pre-Refund Wage Verification Program.

TAS Recommendations and IRS Responses

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1.

TAS RECOMMENDATION #4-1

Begin tracking the IVO false positive rates by model or filter during the filing season, perform regular global reviews, and quickly adapt filters, rules, and models based on levels of confidence in each similar to the TPP.

IRS RESPONSE TO RECOMMENDATION: In April 2016, RICS began reporting each Return Review Program Non-Identity Theft model False Detection Rate (FDR) separately and documenting the results. This information will be shared with Taxpayer Advocate Service on a periodic basis. In addition, we are currently creating baseline statistics for the IVO program and will monitor the FDR of each fraud model separately.

For clarification, our non-identity theft model reporting uses the metric of a false detection rate. A false detection rate is the number of false positives divided by the number selected. We believe the false detection rate more accurately reflects the performance of a selection model.

Update: FDR and/or performance for all filters in RRP, DDB and FRE are reviewed throughout the filing season to monitor performance and/or make necessary changes. The final review of filters for IDT and Non-IDT FY17 inventories  took place on November 30, 2016.  Filter performances were reviewed for identity theft work and planned performance was determined.  Non-identity theft selections were discussed on December 6th based upon the November 30th assumptions, with plans for the filing season determined at that time. Filters are currently being programmed in preparation for the filing season.

CORRECTIVE ACTION: Throughout the remainder of Calendar Year (CY) 2016, the FDR metrics for the Non-IDT models will be reviewed by IRS leadership, with in-year model adjustments to be implemented where prudent to minimize the selection of falsely detected returns. At the end of CY 2016, the business team will perform a comprehensive assessment of fraud model performance, and issue recommendations for larger-scale improvement to filters, rules and models to be implemented at the start of the next Filing Season.

TAS RESPONSE: The National Taxpayer Advocate is encouraged by this new development and appreciates the IRS’s recent commitment to begin tracking Non-IDT model false detection rates. However, because the IRS just began tracking this data in April 2016, TAS is currently unable to determine if the IRS can properly identify the major factors that are causing the greater percentage of frozen legitimate refunds and the steps the IRS will take when a problem with a filter or model is identified. TAS looks forward to discussing the results with the IRS and recommends a consistent, collaborative effort moving forward.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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2.

TAS RECOMMENDATION #4-2

Establish target false positive rates for each process and filter and create a process to adjust selection rates so that the false positive rates do not exceed target level.

IRS RESPONSE TO RECOMMENDATION: NTA Recommendation Not Adopted as Written, but IRS Actions Taken to Address Issues Raised by NTA. The establishment of precise target false detection rates per Fraud Model (“Non-Identity Theft Model”) would be challenging to implement because specific FDR are typically not available until several months into the filing season. In addition, new models which are developed to detect emerging fraudulent trends may exhibit false detection rates which could exceed a level set prior to the start of the filing season and require monitoring and adjusting. However, the IRS has a strong commitment to balance increased detection of refund fraud with taxpayer burden concerns. We are in the process of creating baseline statistics for the IVO program and will monitor the false detection rates of each fraud model separately. The overall results will be reviewed to make adjustments where prudent to minimize the selection of false positive returns, while continuing to ensure prevention of fraudulent refunds.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The Consolidated Appropriations Act of 2016 now requires Forms W-2 and W-3 and returns or statements that report non-employee compensation (e.g., Forms 1099-MISC) to be filed on or before January 31 of the year following the CY to which the returns relate. By accelerating the deadline to January 31, the IRS will be able to confirm wage and tax information earlier in the filing season and have more time to analyze false positive rates in real time and adjust accordingly.

Additionally, achieving greater accuracy in false positives means the IRS is serious about doing “real time” filter or model adjustments. For instance, if there is an emerging return fraud scheme and it results in a 50 percent false positive rate, then the filter or model is not working as intended. It is very likely that it is selecting wrong returns, i.e., the legitimate ones instead of the fraudulent ones.

If the IRS realizes the importance of minimizing taxpayer burden and being accurate in the return selection process, it will commit to a target rate, which can serve as an aspirational goal for its employees. A staggered plan to meet the target false positive rate would allow the IRS to move step-by-step in that direction until the rate is met. TAS also suggests that IRS consider what other industries (e.g., financial, insurance, banking) have adopted as measures to minimize false positives.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Partially Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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3.

TAS RECOMMENDATION #4-3

Collaborate with TAS on implementing the new legal requirement to file returns and statements related to employee wage information and nonemployee compensation on or before January 31 of the year following the calendar year to which such returns relate.

IRS RESPONSE TO RECOMMENDATION: Under the Consolidated Appropriations Act, 2016, the deadline for filing Forms W-2 and W-3 and nonemployee compensation with the SSA has effectively been accelerated to January 31, beginning in calendar year 2017. The act also delayed issuance of certain refunds to no earlier than February 15th for credits or overpayments claimed on the return. We are working to enhance IRS systems so that income information received from the SSA can be processed and posted immediately to the IRMF, and in turn be leveraged for systemic income and withholding verification. A working group was established to identify appropriate system and procedural needs. We agree that TAS should be included in this working group.

Update: The IRS implemented the PATH ACT for filing season 2017 taking advantage of the earlier submission of Third Party documents. Systemic Verification in the Return Review Program is being used and performance enhanced by the early submissions. Our initial working group meeting held on April 11, 2016 included other business units and TAS, which resulted in in a collaborative and cooperative effort.

CORRECTIVE ACTION: We are working to enhance IRS systems so that income information received from the SSA can be processed and posted immediately to the IRMF, and in turn be leveraged for systemic income and withholding verification. A working group was established to identify appropriate system and procedural needs.  We agree that TAS should be included in this working group.

TAS RESPONSE: The National Taxpayer Advocate is pleased the IRS is working on posting wage and tax information quicker so the information can be used to verify income and withholding upfront, thereby reducing refund delays and taxpayer burden. The National Taxpayer Advocate looks forward to being included in the working group.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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4.

TAS RECOMMENDATION #4-4

Reinstate the Pre-Refund Program Executive Steering Committee to coordinate policy and other servicewide processes and business rules and include TAS in the steering committees as a charter voting member.

IRS RESPONSE TO RECOMMENDATION: The IRS does not plan to reinstate the Pre-Refund Program Executive Steering Committee, as the current operational oversight structure for reviewing and approving model, rule and filter changes has proven to be effective in both offering rigorous deliberation of any proposed changes, while also serving to foster innovation in detecting new fraud patterns. 

CORRECTIVE ACTION: N/A

TAS RESPONSE: The National Taxpayer Advocate is disappointed by the IRS’s decision not to reinstate the Pre-Refund Program Executive Steering Committee (ESC). While the IRS may believe that current operational oversight structure for reviewing and approving model, rule, or filter changes is adequate, the continuing high rate of false positives in the IWV program suggests otherwise. Without the ESC, the IRS is not adequately equipped to discuss problems associated with fraud detection data mining rules at a servicewide level, and does not have a suitable forum to discuss potential flaws in filters and models which could lead to effective, real time adjustments. As stated in the 2013 and 2015 Annual Reports to Congress, the National Taxpayer Advocate recommends the IRS should re-instate the Pre-Refund Program ESC as a forum for the exchange of information about systemic issues among IRS functions and for ideas about how to resolve these issues.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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5.

TAS RECOMMENDATION #4-5

Create a sub-committee under the Business Rules and Requirements Management office with the authority to implement real-time modifications to screening rules and filters pertaining to tax fraud detection, resolution, and prevention, which directly affect RRP systems development; include a TAS representative as a member of this sub-committee.

IRS RESPONSE TO RECOMMENDATION: NTA Recommendation Not Adopted as Written, but IRS Actions Taken to Address Issues Raised by NTA. There is an operational structure in place that addresses fraud model modifications in an almost real time atmosphere. We will provide the NTA with an overview briefing of any model modifications on a periodic basis.

CORRECTIVE ACTION: There is an operational structure in place that addresses fraud model modifications in an almost real time atmosphere. We will provide the NTA with an overview briefing of any model modifications on a periodic basis. 

TAS RESPONSE: The National Taxpayer Advocate is pleased the IRS is now recognizing the need to address fraud model modifications in a real time atmosphere. False positive data, if monitored and analyzed in real time, can be used by the IRS to improve its fraud prevention, minimize harm to taxpayers, and preserve IRS resources. However, under the current operational structure, in scenarios where the IRS can update models or filters in real time, it needs approval from the Business Rules and Requirements Management (BRRM) office. BRRM does not meet regularly; therefore, any “real time” change request that requires immediate attention must go through a time-consuming process resulting in more refund delays.

Creating a sub-approval group authorized to implement real time modifications to screening rules and filters would allow a quicker resolution of systemic issues and minimize taxpayer harm.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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6.

TAS RECOMMENDATION #4-6

Create a Taxpayer Call Area in IVO, which will include front-end outgoing verification calls to taxpayers from the IVO unit and the answering of direct taxpayer calls about refunds.

IRS RESPONSE TO RECOMMENDATION: NTA Recommendation Not Adopted as Written, but IRS Actions Taken to Address Issues Raised by NTA. IVO currently performs front-end phone calls to employers to conduct a verification of the income claimed on the taxpayers return. An IRS letter/notice is generated to the taxpayer to inform them of the delay in refund issuance as a result of possible third party verification being completed and provides the appropriate timeframe this review may take. Toll-free assistors have guidance on how to respond to phone calls associated with this process; as a result direct phone contact with the taxpayer within IVO would not provide additional information to expedite resolution. We are in the process of reviewing IVO end-to-end processes to determine if there are opportunities to increase efficiency or reduce taxpayer burden. The reviews will ensure that the appropriate notices/letters are generated to keep the taxpayer informed, as well as ensuring that refunds are released timely, as applicable. Legislation accelerating the due date of information returns to January 31 will enable IRS to leverage the data to complete systemic verification of the income and withholding upfront, reducing refund delays and taxpayer burden.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The National Taxpayer Advocate is encouraged by the IRS’s recent commitment, both systemically and financially, to improving telephone service for taxpayers. However, it does not seem that the IRS has fully comprehended or addressed the recommendation. Unlike within the TPP, the IRS still does not provide a dedicated phone number for taxpayers to call the IVO unit. When a taxpayer is able to reach a Customer Service Representative (CSR) the taxpayer will find that the CSR does not have access to the EFDS or RRP histories and cannot give specific responses to taxpayer inquiries. By creating a dedicated phone number staffed with CSRs with proper access to taxpayer case histories, taxpayers will not only be provided with a specific update regarding their refund status, but they may also be able to assist the IRS by providing additional information to complete the IRS’s inquiry.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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