IRS says F*CK YOU to low income taxpayers, and freezes their refunds giving them a chance to defend themselves.

Posted 1/10/2006 4:24 PM Updated 1/10/2006 11:13 PM

IRS quietly freezes many refunds By Sandra Block, USA TODAY

The IRS has frozen refunds for hundreds of thousands of low-income taxpayers without telling them they're being investigated for tax fraud or giving them a chance to defend themselves, the IRS taxpayer advocate said Tuesday. In a blistering report to Congress, Taxpayer Advocate Nina Olson said complaints about unpaid tax refunds have soared more than 400% since 2002. Sixty-six percent of those who complained were entitled to a full refund, an investigation by her office found. An additional 14% were determined to be eligible for a partial refund, Olson says.

The issue raises "serious questions" about the protection of taxpayer rights and might constitute a violation of due process of law, Olson charged in her report.

More than three-quarters of the returns investigated were for low-income families who claimed the earned income tax credit, a program that provides tax refunds for the working poor. Delayed refunds cause a "significant hardship" for these taxpayers, the report said.

The taxpayer advocate's office estimates up to 1.6 million refunds have been frozen over the past five years. Once a taxpayer's refund is frozen, the IRS will automatically freeze future refund claims until the taxpayer files an undisclosed number of "legitimate" returns, the taxpayer advocate report says.

The IRS doesn't notify taxpayers that their returns are being investigated for fraud. And even if taxpayers inquire about their refunds, IRS employees are usually barred from providing any information until six months after the taxpayer's inquiry, Olson says.

The IRS is working to improve communications with people whose refunds have been frozen, says Richard Speier, acting chief of the IRS Criminal Investigation office. Still, the delay in information is needed to avoid tipping off targets of fraud investigations, Speier says.

"A lot of times, these are ongoing investigations where an individual will be filing multiple claims for refunds throughout the filing season," he says.

In its response to Olson's report, the IRS also contended that her conclusions were drawn from a "significantly biased" sample of taxpayers that doesn't accurately reflect the program. Taxpayers who are innocent are far more likely to complain to the taxpayer advocate than are those who've filed fraudulent returns, the IRS said.

The IRS Questionable Refund Program has existed since 1977. In recent years, though, the IRS has used sophisticated computerized screening to look for fraudulent returns. In 2004, investigators identified 500,000 potentially fraudulent returns representing one-half of 1% of the returns claiming a refund the IRS says.

Olson says the electronic sweeps are a smart use of government resources but says the IRS lacks the staff to investigate all the returns that are automatically flagged because they contain something suspicious. As a result, she says, some refunds end up frozen for months or years before they're referred to IRS examiners.

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