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IRS Rejects Legal Tax Refunds Sought By Poor, Group Claims

By David Cay Johnston

Tax refunds sought by 1.6 million poor Americans over the last five years were frozen and their returns labeled fraudulent, although the vast majority appear to have done nothing wrong, the IRS’ taxpayer advocate told Congress on Tuesday.

A computer program identified the refund requests as suspect and automatically flagged the taxpayers for extra scrutiny for years to come, the advocate said in her annual report to Congress. These taxpayers were not told that the IRS criminal investigation division suspected fraud.

The advocate, Nina Olson, said the IRS devotes vastly more resources to pursuing questionable refunds sought by the poor — which under the highest estimate is $9 billion — than to the $100 billion in taxes not paid each year by people who work for cash and fail to file tax returns or understate their income.

As for the suspected fraud in refund requests, Olson said her staff sampled suspected returns and found that 66 percent were entitled to the amount sought or more. Another 14 percent were due a partial refund. She expressed doubt that many among the remaining 20 percent had committed fraud.

Unless taxpayers press for their refunds, Olson said, they “are not given an opportunity to substantiate their claims or to show that any overclaims identified were due to honest error rather than fraud.”

The IRS criminal division defended its program as a successful effort to protect against refund fraud, saying it “has stopped literally billions of dollars of false refunds to criminals.”

It said the program was intended to be fair to all taxpayers while efficiently using limited law enforcement resources.

Olson also said in her report that the IRS is answering far fewer telephone calls, spending far less to teach small businesses how to comply with the tax laws and, in general, is cutting back on services to help taxpayers comply with the law. She said cutting taxpayer assistance would probably result in making it more costly to collect taxes.