Tax Fraud and Noncompliance: IRS Could Further Leverage the Return Review Program to Strengthen Tax Enforcement

Fast Facts

The Return Review Program is one of IRS's key systems for detecting tax fraud and preventing bad refunds—preventing about $4.4 billion in bad refunds during the 2017 filing season.

IRS monitors the program's performance and adjusts it to address new threats, but we found ways to improve and expand use of the program.

For example, we recommended ways to increase the amount of data available to the program, including loading W-2 data into it more frequently and digitizing paper returns. We also recommended using the program for other tax enforcement activities such as selecting returns for audits or checking them for underreported income.

The Return Review Program Screens Individual Tax Returns Before IRS Issues Refunds

Image showing the Return Review Program screening legitimate and fraudulent tax returns.

Highlights

What GAO Found

The Internal Revenue Service's (IRS) Return Review Program (RRP) detects and selects potentially fraudulent returns to prevent the issuance of invalid refunds. According to IRS, RRP uses advanced analytic techniques and various data sources, including prior-year tax returns, to assign multiple scores to individual returns based on characteristics of identity theft and other refund fraud.

The Return Review Program Screens Returns Before IRS Issues Refunds

GAO found that IRS routinely monitors RRP's performance and adapts RRP to improve detection and address evolving fraud threats. Each year IRS updates RRP's detection tools to improve accuracy for the next filing season.

IRS has plans to continue developing RRP to further prevent invalid refunds, including using RRP to analyze and detect fraudulent business returns. However, GAO identified other opportunities for IRS to improve RRP's fraud detection and to use RRP for other enforcement activities:

RRP's ability to accurately detect and select suspicious returns could benefit from having information on Forms W-2, Wage and Tax Statements (W-2) available for analysis more frequently. As of April 2018, IRS officials said they were drafting but had not yet approved a work request to load W-2s into RRP daily instead of weekly for the 2019 filing season.

IRS could collect more information electronically from paper filers. One approach IRS evaluated in 2012 is to digitize some paper returns using barcoding technology, but it has not updated that analysis or expanded it to consider other digitizing technologies. IRS requested that Congress require that returns prepared electronically but filed on paper include a scannable code printed on the return, but Congress had not done so as of May 2018.

IRS could apply RRP's capabilities to improve other tax enforcement activities, such as audit selection or underreporting detection. Individuals' underreporting of tax liabilities accounts for hundreds of billions in lost tax revenue. Until IRS evaluates the costs and benefits of expanding RRP to analyze returns not claiming refunds, IRS will not have the information needed to make decisions that could help streamline processes for detecting and treating additional types of noncompliance and fraud.

Why GAO Did This Study

Tax noncompliance, including refund fraud, threatens the integrity of the tax system and costs the federal government hundreds of billions of dollars annually. RRP is IRS's primary pre-refund system for detecting and preventing the issuance of invalid refunds. IRS reported that between January 2015 and November 2017 RRP prevented the issuance of more than $6.51 billion in invalid refunds.

GAO was asked to examine RRP's capabilities. This report (1) describes how RRP detects and selects suspicious returns and prevents invalid refunds; (2) assesses how IRS monitors and adapts RRP; and (3) examines what else, if anything, IRS can do to strengthen RRP and use it to address other enforcement issues.

GAO reviewed IRS plans for RRP and documents on its performance. GAO compared IRS's efforts to federal internal control standards, GAO's Fraud Risk Framework and IRS's strategic plan. GAO interviewed IRS officials who work on and use RRP.

Recommendations

GAO suggests Congress consider legislation to require that returns prepared electronically but filed on paper include a scannable code. GAO is also making five recommendations to IRS, including that IRS take action to make incoming W-2s available to RRP more frequently, update and expand a 2012 analysis of the costs and benefits of digitizing returns filed on paper, evaluate the costs and benefits of expanding RRP to analyze returns not claiming refunds, and take any appropriate action based on those evaluations. IRS agreed with GAO's recommendations.

Matter for Congressional Consideration

Matter	Status	Comments
Congress should consider legislation to require that returns prepared electronically but filed on paper include a scannable code printed on the return. (Matter for Consideration 1)	Open	No legislation enacted requiring a scannable code, as of March 11, 2024. In January 2024, S. 3660 (118th Cong.) was introduced that would require federal tax returns that are prepared electronically, but printed and filed on paper, to bear a code that when scanned converts the data in the return to an electronic format. In April 2023, H.R. 2688 (118th Cong.) was introduced with the same provision. In the 117th Congress, there were also two bills introduced as well with this provision: Section 502 of S. 2782 and Section 2 of H.R. 7428. Enacting such legislation would allow IRS to scan and digitize information from these returns and could strengthen IRS's tax enforcement efforts, resulting in increased compliance revenue.

Recommendations for Executive Action

Agency Affected	Recommendation	Status
Internal Revenue Service	Priority Rec. The Commissioner of Internal Revenue should increase the frequency at which incoming W-2 information is made available to RRP. (Recommendation 1)	Closed – Implemented In January 2019 IRS increased the frequency at which incoming W-2 information is made available to RRP. IRS loads W-2 data onto the Information Return Master File (IRMF), which then makes the data available to RRP. In August 2018 we found that IRS provided incoming W-2 information to RRP once per week because this was how frequently IRS loaded incoming W-2 information onto IRMF. IRS officials also told us in August 2018 that the agency planned to increase the frequency at which W-2 information would be loaded onto IRMF. In July 2019, IRS provided documentation demonstrating that the agency had begun loading the information onto IRMF on a daily basis beginning in January 2019. Doing so will enable IRS to expand its efforts to systemically verify wage information reported on tax returns and avoid issuing invalid refunds.
Internal Revenue Service	Priority Rec. The Commissioner of Internal Revenue should update and expand a 2012 analysis of the costs and benefits of digitizing returns filed on paper to consider any new technology or additional benefits associated with RRP's enhanced enforcement capabilities. (Recommendation 2)	Closed – Implemented IRS agreed with this recommendation and in December 2019, IRS officials reported that the agency plans to begin scanning and digitizing individual tax returns filed on paper beginning in October 2021. Consistent with GAO's recommendation, IRS is also considering additional benefits that digitization of paper returns could have on the Return Review Program's enhanced enforcement capabilities. In November 2018, IRS reported that digitizing paper returns at intake would allow IRS to use the same RRP filtering on all paper and electronic forms, allow more pre-refund audits or investigations, and reduce processing time, among other benefits.
Internal Revenue Service	Priority Rec. Based on the assessment in recommendation 2, the Commissioner of Internal Revenue should implement the most cost-effective method to digitize information provided by taxpayers who file returns on paper. (Recommendation 3)	Open – Partially Addressed IRS agreed with GAO's July 2018 recommendation and has taken steps to modernize the processing of individual and business paper returns in recent years. Steps include accessing electronic amended returns, an internet portal for businesses to e-file forms, and testing scanning solutions to digitally process paper-filed returns. These efforts are yielding results. During the 2023 filing season, fewer individual and business paper returns were filed. Less than 4 percent of individual returns were paper in 2023 compared to 8 percent in the 2019 filing season. For the 4 percent of paper-filed returns and forms, IRS told us that, as of August 2024, it is implementing the scanning solution to digitally process paper-filed returns, starting with form 940 in October 2024 and form 1040 in January 2025. According to IRS, it is on track to meet its goal to digitally process 100 percent of paper-filed tax returns and information documents by the end of 2025, consistent with this recommendation. Full digitization of paper forms would allow IRS to reduce processing time, use the Return Review Program (RRP) fraud filters on all paper and electronic forms, and allow more pre-refund compliance checks or investigations, among other benefits.
Internal Revenue Service	Priority Rec. The Commissioner of Internal Revenue should evaluate the costs and benefits of expanding RRP to analyze individual returns not claiming refunds to support other enforcement activities. (Recommendation 4)	Closed – Implemented IRS agreed with GAO's July 2018 recommendation, noting that an agency goal is to expand the use of RRP to improve tax compliance and enforcement. IRS reported in January 2022 that it completed its extended evaluation to quantify the potential benefits of expanding RRP. According to IRS data, the evaluation showed an overall 15 percent improvement in taxpayer compliance and other benefits that increased revenue and led to increased efficiencies in IRS's work processes. This analysis is consistent with GAO's recommendation and demonstrates how RRP helps in streamlining the detection and treatment of fraud and can increase taxpayer compliance.
Internal Revenue Service	Priority Rec. Based on the assessment in recommendation 4, the Commissioner of Internal Revenue should expand RRP to support identified activities. (Recommendation 5)	Open – Partially Addressed IRS agreed with GAO's July 2018 recommendation and has taken steps to expand its use of RRP's technology. For example, in October 2022, IRS started using RRP to check for fraud and other withholding errors on digitized amended returns, helping examiners prioritize thousands of amended returns for manual review. RRP's technology has the potential to support key objectives outlined in IRS's Strategic Operating Plan. For example, one way to resolve taxpayer issues more quickly is to enhance systemic checks on tax returns to identify issues at the point of filing and notify taxpayers. Another priority is to expand enforcement on taxpayers with complex filings and high-dollar noncompliance. Expanded enforcement could be supported by expanding RRP to analyze all individual and business tax returns -- not just those seeking refunds. To fully implement this recommendation, IRS needs to continue leveraging RRP's capabilities to enhance tax enforcement, and other benefits in areas such as underreporting and audit selection. These are key components of IRS's efforts to increase the collection of hundreds of billions of owed tax revenue.