IRS Reacts To Criticism Over Frozen Refunds

by Glen Shapiro, LawAndTax-News.com, New York

26 January 2006

IRS Commissioner Mark W. Everson this week announced that he has directed a review of the Questionable Refund Program, which will include notification procedures pertaining to frozen refunds.

"We will announce plans in the very near future to institute notification procedures as well as significant processing improvements to minimize the number of taxpayers whose refunds are frozen unnecessarily," Everson stated in announcing the review.

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 week, 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.

Calling for the tax authority to provide at least ninety days notice that an anticipated refund has been frozen, Senator Grassley stated in his letter that:

"As is so often the case with the work of the IRS it is a necessary balance between taxpayer rights and enforcement of the law. My concern is that the balance has been lost in this case when the...taxpayer is provided little, and sometimes zero, timely notice that they will not be getting a refund."

The IRS established the Questionable Refund Program (QRP) to deal with the 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.

The typical fraudulent refund claim involves false income and withholding. A significant portion includes false Earned Income Tax Credit claims of up to $4,400 per return.

“Claiming fraudulent refunds ultimately undermines the integrity of the tax system, but I believe that appropriate notification should be given when refunds have been frozen,” Everson concluded, adding that: “Honest taxpayers expecting a refund deserve to be treated fairly.”

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