Washington – Under pressure from Congress and the agency’s own taxpayer advocate, the head of the Internal Revenue Service said Tuesday that the IRS will begin notifying taxpayers when their refunds are withheld because of suspicions of fraud.
Last year, according to a study by the office of the National Taxpayer Advocate, the IRS “froze” more than 120,000 refunds that were identified by software in its Questionable Refund Program as likely to be fraudulent.
Over the past five years, the number of such refunds topped more than 1.6 million.
Taxpayers were not notified when their refunds were frozen, nor were they given a chance to respond.
Some of the refunds were eventually released, after what the report said was a median delay of more than 8 1/2 months. Others, however, were left in “permanent freeze status,” the report said, adding that in such cases, unless the taxpayer contacted the IRS, he or she would never find out what became of the refund.
Nina Olson, the taxpayer advocate, cited the issue in her annual report to Congress this month as the second-most serious problem in tax administration.
Only the shift in IRS resources toward enforcement and away from taxpayer service was more serious, she said, because it affected more taxpayers.
Many of the blocked refunds involved the earned income tax credit, which is available to low- income working families and can give them an additional cash payment beyond their tax refund.
The report elicited concern from many on Capitol Hill, including Sens. Charles Grassley, R- Iowa, and Max Baucus, D-Mont., the chairman and ranking minority member, respectively, of the Senate Finance Committee.
IRS Commissioner Mark Everson said he had ordered a review of the program.
“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 said, without giving further details.
Agency officials noted after the release of Olson’s report that the 120,000 frozen refunds represented a tiny fraction of the 130 million returns filed annually and that the IRS has seen a quadrupling in refund fraud in the past six years.
