Electronic filing a booby trap to IRS

February 21, 1994|By Robert D. Hershey Jr. | Robert D. Hershey Jr.,New York Times News Service

WASHINGTON — An article in Sunday's Sun about electronic tax fraud incorrectly reported the states in which taxpayers can file federal and state tax returns in a single transmission to the IRS. In Maryland, filing a return requires a separate transmission.

The Baltimore Sun regrets the errors.

WASHINGTON -- Seeking to automate its way out of a morass of paper by encouraging the electronic filing of tax returns, the Internal Revenue Service now faces a costly threat from thieves using the technology to get fraudulent refunds.

Officials say the electronic filing system, which the agency is counting on to handle 80 million returns by 2001, is coming under increasingly bold and sophisticated attacks.

FOR THE RECORD - CORRECTION

More than 25,000 fraudulent electronic returns were detected in the first 10 months of 1993, more than double the number in the same period in 1992, as electronic filing grew last year to account for about 40 percent of all detected frauds.

Congressional critics of the program say the IRS has largely brought the problem on itself by hurrying to promote the system before it is ready.

It sends refunds more quickly, for example, when returns are filed and processed electronically -- more quickly, in fact, than it can verify the claims, because verification still depends on paper documents, like W2s and handwritten signatures, that are mailed in afterward.

To avoid aiding criminals, the IRS is unwilling to specify techniques used in electronic fraud, but they typically involve overstating income tax withheld or refundable credits.

The IRS estimates its loss from electronic fraud at tens of millions of dollars a year, but it and outside specialists fear it could be much higher. Apart from the money, the agency worries about further erosion of confidence in the system, already evident in a $150 billion annual tax gap -- the amount owed but not paid -- which is believed to be related to an audit rate of less than 1 percent.

As part of its counteroffensive, the IRS has enlisted supercomputers at the Los Alamos National Laboratory in New Mexico, normally engaged in nuclear weapons research, to artificial intelligence work on detecting anomalies in returns and uncovering suspicious patterns.

People in more than 20 states can file federal and state returns in one transmission to the IRS. State tax returns cannot yet be filed electronically in Maryland. The program was first offered nationally in 1990. Through Feb. 11 this year, taxpayers filed 7,387,000 electronic returns, roughly half the expected electronic total for the season.

The IRS has a tremendous stake in the spread of electronic filing because the explosion in the number of documents associated with paper returns and the keyboarding they require threatens to swamp the system. Therefore, it has offered to pay refunds on electronic returns in three weeks, about half the normal time for refunds from paper returns. This can be cut to two weeks if the refund is deposited directly into the taxpayer's bank account.

In addition, for a fee, electronic filers can arrange refund anticipation loans from their banks, which normally get the taxpayer's money in three days.

The IRS is in the midst of a $10 billion modernization program, the biggest nonmilitary procurement program in the government, which nearly total computerization will supplant in the next several years a system that relies heavily on the labor-intensive handling of paper.

"Electronic filing is the way," particularly for complicated individual and business returns, Jennie S. Stathis, director of tax policy and administration issues at the General Accounting Office, told Congress on Feb. 10. "The paper is just killing them."

Acknowledging the problem while rejecting some proposed remedies, the IRS commissioner, Margaret Milner Richardson, said at the congressional hearing that several return preparers had been stricken from the list of authorized electronic filers this year and that "numerous" criminal investigations had begun.

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