At least two months before the IRS mistakenly began paying an estimated $200 million in fraudulent or erroneous 2006 tax season refunds, the agency was warned about potentially “catastrophic” problems in a new computer being developed to avert such a blunder.
A USA TODAY examination of the IRS Electronic Fraud Detection System project found the previously unpublicized November 2005 warning, along with other warnings and new details of missteps that culminated in one of the most costly and embarrassing episodes in the tax agency's recent history.
As the peak of the 2006 tax season approached last spring, the IRS discovered that a planned upgrade of the agency computer that red-flags potentially fraudulent tax refunds had failed. The discovery came after the IRS had shut down the older computer. The failure forced the agency to continue processing 2006 tax season returns — and issuing refunds — without its first line of electronic defense against fraud.
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