IRS Improperly Freezes Refunds, Report Says
WASHINGTON — The government improperly identifies hundreds of thousands of taxpayers every year as potential cheats, forcing them to endure needless delays of up to three years to receive the refunds they deserve, according to the Internal Revenue Service's taxpayer advocate.
And the IRS does not make a practice of contacting taxpayers under investigation and allowing unwitting suspects the chance to prove that their returns were accurate -- or to show that errors were honest mistakes rather than fraud.
Many of the taxpayers whose refunds have been held back are working poor people who need the money, said Nina E. Olson, head of the Taxpayer Advocate Service, an agency created within the IRS to handle taxpayer complaints.
A report issued Tuesday by Olson's office flagged the practice of freezing refunds as one of the most serious failings in IRS operations. The IRS "cannot and should not treat every taxpayer as a tax cheat," the report said.
The review found that in 80% of a sample of such cases brought to the taxpayer advocate last year, the IRS wound up paying full or partial refunds.
The overwhelming number of people affected were poor. One possible contributor is the complexity of the earned income tax credit, a benefit designed for low-income workers.
The earned income tax credit refunds as much as $4,400 of tax payments for couples with two or more children who earn about $37,000 or less. A single person with no children would get up to $399 back if they earn up to $13,750.
The median adjusted gross income of taxpayers whose refunds were frozen and whose cases were reviewed was $13,300 -- and the median refund was $3,519.
The survey found that the median delay was 8 1/2 months.
Olson said in an interview that the refund problem developed as the IRS tried to bolster its enforcement function in response to increasing tax fraud. "The IRS should be doing it," she said, "but it should be doing it well. It shouldn't be tormenting people."
The advocate service's findings regarding the "questionable refund program" drew swift reactions from leading senators in both parties.
Senate Finance Committee Chairman Charles E. Grassley (R-Iowa) said he was "especially troubled" by the suggestion that innocent taxpayers were having money withheld.
