Even though the Internal Revenue Service relies on data provided by outside sources to verify the accuracy of tax returns, it lacks a centralized database to store it all, finds the Treasury Inspector General for Tax Administration.

In a report dated July 13--but made publically availably Sept. 21 and in redacted form--TIGTA auditors also criticize the tax agency for not making full use of the third party data it receives to detect erroneous refunds. In fact, the IRS doesn't validate the data it receives nor does it ensure that systems utilize only corrected data files during tax processing, auditors say.

The third party data is important because taxpayers either understated their income or overstated their deductions to the point where about $232 billion of taxes went unpaid in 2000, according to IRS estimates quoted in the report.  

When auditors asked for a list of all third party providers of data, IRS officials said they couldn't supply it. During 2007,the IRS received almost 1.8 billion documents such as real estate transactions from outside sources.

However, the IRS rejected a TIGTA recommendation that it create a centralized database, telling auditors that it has established procedures that will allow all parts of the agency to access relevant data. Auditors write that they stand by their recommendation since while the IRS does have a list of third party data files, the list is incomplete and relevant IRS personnel appear not to know about its existence.

And while the IRS did agree with a TIGTA recommendation that it start validating data, auditors express some skepticism, noting that that the tax agency didn't provide an implementation date or name an official responsible for the validation.

As for making better use of the data, TIGTA said that better utilization could detect more cases of fraud. For example, while the IRS mostly uses data from the Social Security Administration to validate the social security number of tax filers, it could use SSA data to flag returns filed by taxpayers allegedly aged 120 years or more. Taxpayers supposedly aged 120 years or more reported almost $59 million in wages and claimed $1.3 million in tax credits during 2008, auditors state.  

For more:
- download the redacted TIGTA report, 2010-40-062

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