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RANCHO RESORT
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Jorgensen Brooks Group
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Tucson Urban League
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Komatsu Equipment Co
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Everready Glass
Sales Reps Finance and Accounting
Charles E. Gillman Company
Accounting Specialist

WASHINGTON — 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 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 Internal Revenue Service's 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 incomes.

As for the suspected fraud, Olson said her staff sampled suspected returns and found that 66 percent were entitled to the amount sought or more. Fourteen 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 over-claims 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, cutting back on services to help taxpayers comply with the law. She said cutting taxpayer assistance probably would result in making it more costly to collect taxes.

Sen. Charles E. Grassley, R-Iowa, chairman of the Senate Finance Committee, said, "We've seen a significant increase in refund abuse in recent years."

"However," he said, "I'm concerned by the advocate's findings that thousands and thousands of taxpayers are having their refunds frozen by the criminal investigation division, yet the taxpayers often do not know their refund has been frozen and can't effectively challenge the IRS' actions."

Olson said the criminal investigators' efforts, known within the IRS as the Questionable Refund Program, were unfair and may be illegal.

"At a minimum, this procedure constitutes an extraordinary violation of fundamental taxpayer rights and fairness," Olson wrote, adding that it "may also constitute a violation of due process of law." Her staff's sample of frozen returns found that the average reported income was about $13,000 and the refund due was about $3,500.

About three-quarters of those affected were employed parents who applied for the Earned Income Tax Credit, under which all income and Social Security taxes can be returned and, in some cases, a payment made.