electronic filing

IRS Balks at TIGTA’s Deactivation of EFINs

Dec 28th 2017
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The IRS is balking at certain corrective actions, including deactivation, recommended by its regulatory watchdog to prevent the unauthorized use of Electronic Filing Identification Numbers (EFINs), according to a new report by the Treasury Inspector General for Tax Administration (TIGTA).

But the IRS contends that some of TIGTA’s recommendations would violate due process in determining wrongdoing.

The IRS’s electronic filing provider program – known as e-file – is an alternative to the traditional paper tax return that allows taxpayers to electronically file their returns through an authorized IRS provider. Such providers generally are the first contact for taxpayers who e-file their returns.

But TIGTA’s audit found that the IRS doesn’t always ensure that EFINs are assigned to qualified providers and deactivated when necessary. The regulatory agency believes that failure to correct the issues will allow providers to make an end run around IRS evaluations and that EFINs will continue to be misused.

TIGTA’s findings include the following:

  • The IRS fails to verify citizenship status for all e-file applicants, including 45 approved applications for a principal or “responsible officials” who the Social Security Administration (SSA) said weren’t U.S. citizens or resident aliens, and 1,494 people with approved applications for whom the SSA had no citizenship status.
  • A statistical sample of 34 approved e-file provider partnership applications found that nine (26 percent) did not include at least one partner with at least a five percent ownership interest in the partnership. TIGTA estimates that almost a third (256) of the 969 partnership applications did not include one or more partners.
  • EFINs aren’t deactivated promptly for deceased principals and other “responsible officials.” Of 965 EFINs with deceased officials, more than a third (349) were still active. The IRS took more than two years on average (1,080 days) to deactivate the EFINs for 399 of the firms with deceased officials.
  • Referrals of 328 EFINs used to file potentially fraudulent tax returns weren’t consistently evaluated nor forwarded to the Electronic Products and Services Support organization. The Integrity and Compliance Services organization didn’t evaluate the 328 EFINs for potential fraud and only 108 were evaluated for identity theft.

TIGTA recommended the following:

  1. Deactivate EFINs connected to providers who aren’t U.S. citizens or residents aliens, and verify the citizenship status for current and former providers for whom the SSA has no record.
  2. Develop strategies to verify the accuracy of e-file applications.
  3. Suspend the EFINs for the nine partnership applications that omitted partners, and request revised applications with named partners.
  4. Determine a timeframe for the deactivation of EFINs for deceased providers.
  5. Make sure that the 349 EFINs still active March 24, 2017, are revised or deactivated as needed.
  6. Finalize the identification and referrals of EFINs connected to possible fraudulent filings to the Electronic Products and Services Support organization.
  7. Review the 286 suspicious EFINs that weren’t referred to the above organization for fraud and deactivated if needed.

While the IRS agreed with most of the recommendations, it did not agree to suspend the EFINs for the nine applications with omitted partners nor to ensure that 286 suspicious EFINs are reviewed for fraud.

Why not? The IRS said that the nine partnership applications didn’t require suspension because there were no violations of the e-file provider program. “Partnerships that choose to identify key persons, instead of including all partners with five percent or greater ownership interest in the partnership, have complied with the program requirements,” wrote Kenneth Corbin, IRS Wage and Investment Division Commissioner, to TIGTA’s Michael McKenney, deputy inspector general for audit.

As for the 286 suspicious EFINs, the tax returns were evaluated for fraud and identity theft and “treated accordingly if fraud or IDT was suspected,” Corbin wrote. “When evidence indicates an EFIN has been misappropriated for use in filing IDT returns, our processes are designed to deactivate it immediately.”

Of the 328 EFINs referred for consideration, 104 were reviewed. Of those, 42 met the criteria for identity theft referrals and were deactivated. Sanctions that address fraudulent or questionable returns unrelated to identity theft are subject to due process and “cannot be initially addressed through EFIN deactivation procedures,” Corbin wrote. “It is incorrect to conclude, based simply on [the] volume of returns filed, that an EFIN holder is responsible for the preparation of suspect returns.”

Standards created by Circular 230, Regulations Governing Practice before the Internal Revenue Service, “do not create a nexus between return preparation and the transmittal of electronic returns,” Corbin wrote. “Further, returns may be prepared by tax professionals who are not EFIN holders and do not transmit their own returns. Conversely, EFIN holders may transmit returns that were prepared by others.”

Therefore, Corbin wrote, deactivating EFINs based on suspicions of preparer ineptness or intentional misdeeds is incorrect. In those cases, disciplinary actions must be based on Circular 230, and a finding of fraud would require more investigation. If an EFIN holder is found to be directly involved in fraud or abusive returns, EFIN sanctions then would be imposed, he wrote.

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