The Treasury Inspector General for Tax Administration (TIGTA) today publicly released its report on the effectiveness of the Internal Revenue Service's (IRS) actions to prevent the issuance of economic stimulus payments for tax refunds identified by the IRS as claiming false refunds.

The review is the latest in a series of TIGTA audits designed to provide Congress with an independent assessment of the IRS's 2008 performance in planning and executing the delivery of rebate checks to more than 130 million taxpayers. As of December 2008, the IRS had distributed 119.2 million stimulus payments totaling $96.3 billion.

TIGTA identified $16.3 million in false refunds and 2,071 false stimulus payments totaling $1.2 million that were inappropriately issued in 2008 due to ineffective controls. Unless controls are improved, TIGTA estimates that approximately $117.6 million in false refunds could be erroneously released over the next 5 years due to the expiration of the temporary freeze within the currently established time periods.

"Although the amount of erroneously identified stimulus payments is small in relation to the total amount issued, TIGTA remains concerned that the existing controls pose a risk that false refunds and stimulus payments will be erroneously issued in the future," commented J. Russell George, the Treasury Inspector General for Tax Administration. "Allowing false stimulus payments or false refunds to be issued reduces the dollars in the Treasury, which is especially critical in this current economic environment."

TIGTA previously reported that the temporary freeze may not give the IRS sufficient time to verify false refunds and that the freeze process used by the Criminal Investigation (CI) Division was complex and confusing. In response to these findings, the CI Division implemented new processes in Processing Year 2008 to prevent false refunds from being issued. However, TIGTA found that the controls were not always working as the IRS believed they would. If the IRS does not take corrective actions, it will continue to be at risk of allowing false refunds to be issued.

TIGTA recommended that the IRS extend the time period for the temporary freeze to provide more time to verify potentially false returns and prevent the issuance of false refunds, and establish a quality review process that will identify false returns that are not automatically transferred for action. The IRS disagreed with these recommendations, but agreed to seek a legal opinion on whether a rebate recovery credit calculated by the IRS requires the issuance of a statutory notice of deficiency.