Report claims IRS improperly withheld refunds
WASHINGTON – Criminal investigators at the Internal Revenue Service froze more than 120,000 taxpayers’ refunds last year on suspicion of fraud without notifying the taxpayers or giving them a chance to respond, the federal National Taxpayer Advocate said in a report released Tuesday.
In fact, based on data from fiscal 2004, the advocate estimated that as many as 1.6 million refunds have been frozen by the IRS’s Criminal Investigation (CI) division over five years without letting taxpayers know they were under “suspicion of criminality or giving the taxpayers an opportunity to provide documentation to support their refund claims.”
“At a minimum, this procedure constitutes an extraordinary violation of fundamental taxpayer rights and fairness. In our view, it may also constitute a violation of due process of law,” said Taxpayer Advocate Nina Olson in her annual report to lawmakers on problem areas in tax administration.
Many taxpayers whose refunds were hung up in the process were low-income taxpayers claiming the Earned Income Tax Credit, and in a sample examined by the Taxpayer Advocate Service nearly two-thirds of them were fully entitled to receive a refund.
“Even in cases where CI has made ‘conclusive’ determinations of fraud and characterized the taxpayers as ‘criminals,’ it has not provided the affected taxpayers with any notice or opportunity to present documentation to rebut CI’s suspicion before a final ‘determination’ is made.” Some refunds are eventually released or the taxpayers subjected to audit. But in many cases, the report said, refunds remain frozen for years.
Taxpayers mystified at the disappearance of their refunds have flooded the Taxpayer Advocate Service (TAS) with requests for assistance. Last year TAS handled more than 28,000 such requests, up from about 16,400 a year earlier, and such complaints now represent the largest number that the advocate service gets about any IRS program.
However, IRS employees, including those of TAS, are generally forbidden to give a taxpayer any information about a missing refund until six months after the taxpayer contacts the agency, Olson’s report said.
Olson acknowledged that dealing with fraud is an important task, and that balancing that goal with protecting taxpayers’ rights isn’t easy.
But a TAS study of some of the cases brought to it by complaining taxpayers found that in 66 percent there was no evidence of current-year fraud and that fully 80 percent of these taxpayers ultimately received either a full refund or partial refund of the amount they had originally claimed.
The median adjusted gross income of tax payers who were found to have committed “no fraud” was $13,330 and the median income of those who claimed the Earned Income Tax Credit was $11,956. The median refund received was $3,685, Olson said in her report
The study also found that the median delay for such taxpayers in getting their refunds was more than 8 1/2 months. “Clearly, the amounts at issue and the lengthy delays cause significant hardship for many of these taxpayers, and the high percentage of ‘no fraud’ findings in the study has important implications,” Olson said.
The Criminal Investigation division in a formal reply to Olson said it is “keenly aware of the impact our fraud detection activities can have on legitimate taxpayers,” but said Olson’s conclusions about the Questionable Refund Program “are drawn from a significantly biased sample and therefore do not accurately represent the effects of the program.” The report “significantly overstated the problem,” the division added.