IRS Acts To Improve Questionable Refund Program

by Mike Gofdrey, Tax-News.com, Washington

08 February 2006

The US Internal Revenue Service on Monday announced new steps to improve the Questionable Refund Program (QRP) and reduce the number of taxpayers subject to frozen refunds.

This follows concerns expressed by Senate Finance Committee chairman Charles Grassley and the National Taxpayer Advocate regarding the length of delay and lack of notification for refund claims.

In a letter to US Treasury Secretary John Snow last month, Senator Grassley (R-Iowa) expressed concern with regard to the many thousands of tax refund freezes put in place by the Internal Revenue Service this year, an issue also raised by the National Taxpayer Advocate, Nina Olson.

A report submitted to Congress earlier this month by Ms Olson, while expressing support for a strong IRS enforcement presence, also warned that the IRS is expanding enforcement at the expense of taxpayer service.

The report cited Criminal Investigation (CI) refund freezes as the second most serious problem facing taxpayers, stating that CI places “freezes” on hundreds of thousands of refunds each year due to a suspicion of fraud and then makes a “determination” whether the returns are, in fact, fraudulent without notifying taxpayers that their refund claims are under review or giving them an opportunity to present evidence supporting their positions.

In FY 2004, more than 28,000 taxpayers whose refunds had been frozen sought assistance from the Taxpayer Advocate Service (TAS). The TAS research function studied a statistically representative sample of these cases and found that, with TAS assistance, taxpayers ultimately received the full amount of the refund they had claimed in 66 percent of the frozen-refund cases and a portion of the refund they had claimed in an additional 14 percent of the cases.

Olson urged the IRS to implement procedures to notify taxpayers promptly that their refunds have been frozen, provide taxpayers with an opportunity to submit supporting documentation, and bring cases to a quicker resolution.

IRS Commissioner Mark W. Everson announced this week that the changes put in place by the tax authority to address concerns include notifying taxpayers when a tax refund has been frozen. Other new procedures will result in a more timely release of frozen tax refunds for those cases that do not warrant further review.

“The actions we’re announcing constitute significant improvements to an important program,” Everson stated, continuing:

“Going forward, we’re going to both improve our screening procedures and notify all taxpayers whose refunds are held. As Senate Finance Chairman Grassley stated when asking us to look at reforms for QRP, the IRS needs to respect the ‘necessary balance between taxpayer rights and enforcement of the law.’ We believe this approach strikes the right balance.”

Highlights of the changes include:

• Improvements to screening procedures. The IRS will improve and refine the accuracy of filters in the program to reduce the initial number of valid refund claims held.
• Notification to taxpayers. The IRS will notify all taxpayers whose refunds are frozen.
• Earlier release of refunds. The IRS will expedite the review of returns, resulting in an earlier release of refunds.
• Notification procedures will be implemented this filing season. Improvements to the screening and review processes will be implemented as soon as possible in the coming months. The IRS will also continue to identify and implement other areas for improvement.

The IRS established the Questionable Refund Program to deal with the serious problem of refund fraud, which has increased significantly in recent years. The IRS estimates that fraudulent refund claims now exceed a half-billion dollars a year.

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