By Joel Havemann and Peter Wallsten
LOS ANGELES TIMES
WASHINGTON - The U.S. government improperly identifies hundreds of thousands of taxpayers every year as potential cheats, forcing them to endure needless delays of up to three years to receive the refunds they deserve, according to the IRS's own taxpayer advocate.
And the IRS does not make a practice of contacting taxpayers under investigation and allowing unwitting suspects the chance to prove that their returns were accurate -- or to show that errors were honest mistakes rather than fraud.
Many of the taxpayers whose refunds have been held back are working poor people who desperately need the money, said Nina Olson, who heads the Taxpayer Advocate Service, an agency created within the IRS to handle taxpayer complaints.
A report issued Tuesday by Olson's office flagged the practice of freezing refunds as one of the most serious failings in IRS operations.
The IRS "cannot and should not treat every taxpayer as a tax cheat," the report argued.
The review found that in 80 percent of a sample of cases of frozen refunds brought to the taxpayer advocate, the IRS wound up paying full or partial refunds.
The overwhelming number of people affected were poor, which Olson could not explain. One possible contributor: the complexity of the earned income tax credit for the working poor.
Olson said in an interview that the refund problem developed as the IRS tried to bolster its enforcement function in response to increasing tax fraud.
"The IRS should be doing it," she said, "but it should be doing it well. It shouldn't be tormenting people."
"Clearly, the amounts at issue and the lengthy delays cause significant hardship for many of these taxpayers," Olson said in her report.
"We've had cases drag on for two or three years," said Diana Leyden, who teaches law at the University of Connecticut and directs the university tax clinic that helps low-income taxpayers file returns.
"Without our services, our clients wouldn't be able to navigate their way over the hurdles the IRS erects."
"This is the biggest check of the year for these families," said Julie Kruse, director of advocacy for the Center for Economic Progress in Chicago, part of a national coalition of organizations that represent low-income people.
"It creates a significant hardship when 25 percent of your income is withheld."
The IRS, given a chance to make its case within Olson's report, responded that she had "significantly overstated the problem."
The taxpayer advocate surveyed only cases of delayed refunds in which the taxpayers complained, and the IRS argued that innocent taxpayers were more likely to complain than guilty ones.
Agency investigative officials conceded that they could do a better job of communicating with taxpayers whose refunds had been frozen.
But "it would be clearly detrimental to any ongoing investigation to notify them that they are under investigation," said Richard Speier, acting chief of the criminal investigations division.
"Our role is to protect the legitimate tax dollars that come in from honest taxpayers."
By temporarily delaying a tiny fraction of the 106 million refunds sought on the nation's 136 million tax returns during 2004, the IRS said it had "stopped literally billions of dollars of false refunds to criminals."
Since 1999, the IRS said, its criminal investigators had stopped nearly $5 billion in fraudulent refunds.
In 2004 alone, it took credit for blocking $2.1 billion in fraudulent refunds.
But that total pales beside the estimate of nearly $300 billion a year that taxpayers owe but do not pay.
And fully $1.8 billion of the $2.1 billion recovered in 2004 came from two returns that were not typical of the low-income returns usually flagged by the IRS.
THE REVIEW
The taxpayer advocate's office initiated its analysis after receiving 28,500 complaints last year from taxpayers whose refunds had been frozen.
The office examined a sample of the complaints after they had been resolved and found that in nearly two-thirds of the cases, the taxpayers were "fully entitled" to receive their entire refund or, in some cases, even more.
Another 14 percent eventually received a partial refund.
The average adjusted gross income of taxpayers whose refunds were frozen and whose cases were reviewed was $13,300 -- and the average refund was $3,519. The survey found that the average delay lasted 81/2 months.
-- Los Angeles Times
