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January 12, 2006

IRS freezing refunds without cause

Jeanne D'Arc points to an alarming story from the Washington Post about the IRS's habit of indefinitely and secretly withholding tax refunds.

Criminal investigators at the Internal Revenue Service froze more than 120,000 taxpayers' refunds last year on suspicion of fraud without notifying the taxpayers or giving them a chance to respond, the national taxpayer advocate said in a report released yesterday.

The advocate's office, which is part of the IRS, looked at a sample of taxpayers who complained that they never received their refunds. In two-thirds of those cases, there was no evidence of fraud. Many of the returns were filed by low-income workers, including some who claimed the earned-income tax credit, which sometimes entitles filers to a cash payment on top of their refunds.

The median adjusted gross income of taxpayers who were found to have committed "no fraud" was $13,330, and the median income of those who claimed the earned-income tax credit was $11,956. The median refund received was $3,685, which represented significant income for the taxpayers involved. [WaPo]

That's right, people's tax refunds just never show up and the IRS doesn't tell them that their refunds aren't coming, let alone why. According to the article, 1.6 million taxpayers have had their refunds frozen over the past five years. Sometimes these freezes result in audits, but if not, the IRS can just hold the money in permanent freeze until a taxpayer asks about it. Recall that the IRS doesn't tell people that their refunds have been withheld in the first place.

For more reactions to the IRS withholding scandal see Battlepanda and Ezra Klein.


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