The software the agency used to screen returns for signs of fraud was to be replaced with a Web-based application by January 2006, but when there was no end in sight to the $20.5 million project, the IRS tried to resurrect the old system. That older program, however, could not be returned to operation in time to handle 2005's returns.
According to the report issued by the Treasury inspector general for tax administration, the lack of a software screening system meant that the IRS may have issued as much as $318.3 million in fraudulent refunds during 2006.
"This failure has cost taxpayers hundreds of millions of dollars and has worked to the benefit of criminals who intentionally filed false returns to defraud the federal government," wrote Rep. Bill Thomas (R-Calif.), the chairman of the House Ways and Means Committee, in a letter to Treasury Secretary Henry Paulson in early August.
The year before, when the old system was working, the IRS identified nearly 133,000 fake returns and stopped $412 million in bogus refund checks from being cut. Without a software screener in place, the IRS was able to halt just $94 million in fraudulent refunds.
"Remarkably poor judgment riddled the project," Thomas continued in his letter to the IRS. "The appropriate individuals need to be held accountable."
In a written response to the report, the IRS' acting chief information officer, Arthur Gonzalez, agreed with all nine recommendations made by the inspector general, who demanded that the agency hold contractors to deadlines and pay them based on meeting those deadlines.
The IRS is working to bring back the earlier system in time for next year's tax season.
Federal agencies have a history of bungled software upgrades. In March 2005, for example, the FBI dumped a computer overhaul that had gone on for more than three years and cost $170 million.
The inspector general's report can be downloaded in PDF format from the Treasury Department's Web site.
[Update: Corrected Wednesday, Sept. 6, 11:00. In paragraph four, the original story reported that Rep. Bill Thomas had sent a letter to a person incorrectly indentified as "Glenn Hubbard," who was incorrectly characterized as head of the IRS. Rep. Thomas's letter was in fact sent to Treasury Secretary Henry Paulson.]