The taxpayer advocate at the Internal Revenue Service told Congress last week that since 2001, the I.R.S. has labeled as fraudulent the tax returns of 1.6 million people and has frozen their refunds without notice, although most appear to have done nothing wrong. Overwhelmingly, the taxpayers are poor and are simply applying for a break created for them.
Members of the staff of the Senate Finance Committee, which oversees the I.R.S., met in private yesterday with crime investigators from the agency. The committee's chairman then issued a letter to the Treasury secretary with the right goal: correcting the I.R.S.'s apparent failure to balance the rights of taxpayers against the need to fight fraud. But the issues raised by the frozen refunds don't end there. Congress should hold public hearings.
The taxpayer advocate represents taxpayers whose problems are not satisfactorily resolved, then reports each year to Congress on the most serious problems encountered. According to the 2005 annual report, 28,000 taxpayers who asked the advocate for help last year turned out to have refunds that had been frozen by I.R.S. investigators because of a finding or suspicion of fraud, or a previous finding of fraud that resulted in an automatic freeze on subsequent refunds. The number of complaints was nearly double the number for the year before.
The advocate, Nina Olson, had her office analyze a representative sample of 500 of the 28,000 frozen refunds. It turned out that 66 percent of the returns deserved the full refund, and 14 percent deserved a partial refund. The analysis also found that the median income of these taxpayers was $13,300 and the median refund was $3,519, which reflects a tax break aimed at the poor that's called the earned-income tax credit. These taxpayers typically waited eight and a half months for refunds that were, on average, about a quarter of their annual incomes.
In a written response to Ms. Olson's findings, I.R.S. criminal investigators asserted that her sample had inflated the number of taxpayers wrongly accused of fraud. They based this assertion largely on the belief that innocent taxpayers "are much more likely" to pursue missing refunds than those who commit fraud. That misses the point. Many of the taxpayers involved - who may be poor, less educated and busy, and who may not speak English - are unlikely to confront the tax man, even if they have nothing to hide. The I.R.S. denied these people due process by determining fraud and freezing their refunds without telling them.
The most stratospheric estimate for the questionable refunds sought by the poor is $9 billion a year, of which fraud is likely to be only a small part. And yet, as Ms. Olson pointed out, the I.R.S. devotes vastly more resources to refund fraud than to the millions of people who fail to file returns or who underreport their incomes, at a cost to the Treasury of an estimated $100 billion a year. Audits of high-income individuals have increased recently, but little headway has been seen against the illegal offshore sheltering of personal wealth that the I.R.S., in 2002, said costs the Treasury an estimated $20 billion to $40 billion a year.
Tax policy during the Bush years has greatly favored rich taxpayers at the ultimate expense of the poor. Tax collection must not do the same.
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