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IRS attacks mostly poor taxpayers { January 11 2006 }

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IRS is blasted in fraud probes
Watchdog: Too many wrongly labeled cheats

By Joel Havemann and Peter Wallsten, Tribune Newspapers: Los Angeles Times
Published January 11, 2006

WASHINGTON -- The 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.

The IRS also does not make a practice of contacting taxpayers under investigation and allowing suspects the chance to prove that their returns were accurate--or to show that errors were honest mistakes rather than fraud.

Many 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.

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 8 1/2 months.

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 said.

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. One possible contributor: the complexity of the earned income tax credit for the working poor.

Olson said the refund problem developed as the IRS tried to bolster enforcement 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."

The advocate office's findings drew swift reaction.

Senate Finance Committee Chairman Charles Grassley (R-Iowa) said he was "especially troubled" by the suggestion that innocent taxpayers were seeing their money withheld.

"Refunds have been a source of abuse recently," Grassley said, "but we need to make sure taxpayers have proper due process when the IRS decides to freeze a refund."

Sen. Max Baucus (D-Mont.), the committee's ranking Democrat, said the report suggests the IRS was going after fraud "at the expense of honest taxpayers who need these refunds for food, medicine, home heating, and other basic needs."

The taxpayer advocate's office began its review after receiving 28,500 complaints last year from taxpayers whose refunds had been frozen.

The office examined a sample of the complaints and found that in nearly two-thirds of them, the taxpayers were "fully entitled" to receive their entire refund or, in some cases, even more. An additional 14 percent received a partial refund.

The IRS said Olson had "significantly overstated the problem." The taxpayer advocate surveyed only cases in which the taxpayers complained; 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 notify them that they are under investigation," said Richard Speier, acting chief of the criminal investigations division.

By delaying a tiny fraction of the 106 million refunds sought during 2004, the IRS said it had "stopped literally billions of dollars of false refunds to criminals."

Copyright 2006, Chicago Tribune

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