Perhaps I should have labeled this post "government secrecy." It seems an IRS criminal investigation unit has been withholding refunds because the unit suspects fraud, but it has not bothered to notify the taxpayers or invite them to respond to its claims. See IRS Froze Refunds, Study Says, in the Jan. 11, 2006 Washington Post. When the action is challenged, the vast majority of these fraud claims have been found to be unfounded, and the taxpayers get their refunds, months later than when expected. In some cases, the refunds remain frozen for years.
The National Taxpayer Advocate estimated that as many as 1.6 million refunds were frozen by this unit in the last five years. These complaints topped the list of those coming into the National Taxpayer Advocate office this year. See the full National Taxpayer Advocate 2006 Annual Report at this link.
Who is the target audience? As we have come to expect recently, from an IRS that put auditing the Earned Income Tax Credit above auditing multimillionaires, the media adjusted gross income of taxpayers found not to have committed fraud but whose refunds were frozen in this way was $13,330. The median frozen refund amount was $3.519, or approximately 26% of the adjusted gross income of the taxpayer. The taxpayer's future refunds will also be frozen, (even if the initial freeze turned out not to be supported by a finding of fraud) until the unit determines that the taxpayer is legitimate. That is an incredibly punitive result for these low-income taxpayers.
These harsh measures do not yield big returns. For the last year reported, the unit claimed $2.1 billion in unpaid taxes were due. However, most of that amount, $1.8 billion, was connected with one refund scheme. That leaves about $300 million of claims that the unit has decided on a preliminary basis should be treated as fraudulent. Of those, more than two-thirds of those actually challenged by the Advocate's office were determined not to be fraudlent, leaving approximately $100 million that may have been at stack in the program for that year. A small sum indeed for the federal fisc, compared to the importance of $3500 for a typical family living at or near the poverty line.
What is the justification for stonewalling taxpayers on this issue? The unit does not notify taxpayers, but rather waits for them to inquire about their refund. When they do inquire, they will not receive a response rapidly. The report indicates (p.37) that the unit will not respond to a taxpayer's inquiry until after 180 days (6 months). There does not seem to be any rationale for this behavior, other than the hope that it will discourage a large number of these low-income taxpayers from pursuing their refund further, leaving that money in the federal fisc.
Kudos to the National Taxpayer Advocate for making this an issue. Low-income taxpayers, in particular, should be able to find out about the freeze in a timely manner so that they can initiate the process for getting their refunds back.
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