A report from the Government Accountability Office makes a surprising claim about how easy it is to make a false refund claim under the COBRA subsidy credit program.
It isn’t easy at all. The report, from the watchdog arm of Congress, found that IRS has solid internal controls that prevent employers from falsely claiming the COBRA subsidy credit on their employment tax returns.
To find out, GAO performed what the report called “covert testing” to identify what controls, if any, IRS had in place to detect suspicious tax claims. And, for good reason: As of March 31 of this year, IRS had received 331,280 returns claiming COBRA credits and issued $718 million in refunds to employers. That’s a lot of room for potential fraud.
A test for security measures
As part of its investigation, GAO created five fictitious businesses. For three of the five companies, GAO filed quarterly tax returns (Form 941) in each quarter of 2009. For the remaining two employers, GAO filed annual federal tax returns (Form 944) in December 2009.
IRS’ controls successfully identified all five fictitious companies that fraudulently applied for COBRA credits and tax refunds based on them. It found IRS:
- prevented the fake employers from getting $8,900 of the $9,182 in refunds the GAO requested, and
- paid out three small refunds (ranging from $38 to $145)
- denied the other requests, and
- began investigating all five firms.
While IRS wouldn’t share its specific controls, it did say they’re risk-based, balancing the potential loss to the government against the cost of investigating potential fraud. Through the first quarter of 2010, 3.6% of COBRA claims were stopped by prepayment checks and submitted for further review.
You can read the full report, GAO-10-804R, Proactive Testing of COBRA Tax Credits, here.