IRS is Spending Millions Annually on Obsolete Fraud Detection System

Posted by Angie Petty on December 16, 2015

Money down the drain

The IRS relies on the Electronic Fraud Detection System (EFDS), launched in 1994, to automatically detect fraudulent returns. However, the system is quickly becoming obsolete in the face of rapidly changing technology, increasingly sophisticated tax scams, and additional legislative demands, such as Affordable Care Act tax credits administration.

In preparation for EFDS’ replacement, the IRS began development of the Return Review Program in FY 2010. According to a Treasury IG for Tax Administration (TIGTA) report published this fall, the two systems have been running in tandem since 2013, but there are no plans to retire the aging EFDS. EFDS costs $18.2 million per year to run and due to technical deficiencies could mean as much as $1.5 billion lost to fraudulent returns every year the system stays in operation.

In March 2012, the IRS performed an analysis that identified a number of risks to operate EFDS beyond 2015.

“While the Client Server EFDS is in production today, limitations and obsolescence are expected to render this system too risky to maintain, upgrade, or operate beyond 2015. Fundamental limitations in technology and design also render it incapable of supporting any significant change in the business model. EFDS is no longer capable of keeping pace with the levels of fraud and increasing business demands,” the analysis stated.

The Treasury IG reported that the IRS has not set a termination date nor established a retirement plan for the EFDS. Since October 2013, the EFDS and the RRP fraud detection modules have run in parallel to validate the

RRP pilot results. However, implementation of RRP stalled in January 2014 when IRS wanted to take time “to evaluate the performance and design of the parallel processing database and to revisit strategic business fraud detection goals.” RRP relaunched in January 2015, but is to be completed in phases over multiple filing seasons. According to the IG report, it will not completely replace EFDS until Phase 3.

Meanwhile, IRS is spending development money, as well as O&M funds on the RRP system. The IG report stated that operating the RRP system in tandem with the EFDS was costing $11.3 million per year. According to the Treasury Exhibit 300 for RRP, in FY 2015 IRS spent a total of $63.6 million of which $16.2 million accounted for O&M costs.

TIGTA recommended that the IRS CTO take the following actions:

  • Develop a system retirement plan for the EFDS and retire the EFDS after validating the Return Review Program effectively identifies, at a minimum, all issues currently identified by the EFDS.
  • Update the Risk Management Plan to reflect the current organizational structure, management process methodology, documentation requirements, and mitigation strategy.
  • Update the Requirements Plan to reflect the current activities, methods, and techniques that are used to perform and support requirements development and requirements management.
  • Ensure that contractors have software licenses to use the required repository and verify that guidance is followed.

IRS management agreed with TIGTA recommendations and plans to finalize the EFDS retirement plan by January 2016.

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