An IRS program designed to identify tax fraud is erroneously ensnaring what could be hundreds of thousands of innocent taxpayers every year, denying them legitimate refunds without their knowledge, according to National Taxpayer Advocate Nina Olson.

In her annual report, released January 10, Olson contended that the “Questionable Refund Program” (QRP) as administered by the IRS Criminal Investigation (CI) Division “raises serious questions about the adequacy of protection for taxpayer rights to a greater degree than any program previously evaluated by the National Taxpayer Advocate.”

"At a minimum, this procedure constitutes an extraordinary violation of fundamental taxpayer rights and fairness. In our view, it may also constitute a violation of due process of law," Olson said.

The QRP attempts to detect fraud by analyzing return data filed by taxpayers claiming refunds. According to Olson’s report, if CI does not sign off within a week on a return flagged by the QRP, the refund is “frozen” -- not issued -- until a more thorough investigation can occur. Future refund claims are also frozen until the taxpayer can submit a “certain number of legitimate returns,” the report said.



In 2005 CI froze more than 120,000 refunds after identifying them as fraudulent, Olson said. She projected that CI had held back approximately two million refunds over the past five years without notifying taxpayers that they were suspected of fraud.

“Thus, taxpayers do not have an opportunity to present documentation to support their refund claims until after CI has made a determination of fraud, if at all,” Olson wrote. “Even in cases where CI has made ‘conclusive’ determinations of fraud and characterized the taxpayers as ‘criminals,’ it has not provided the affected taxpayers with any notice or opportunity to present documentation to rebut CI’s suspicion before a final ‘determination’ is made.”



IRS employees, including those in Olson’s Taxpayer Advocate Service (TAS) office, are generally barred from providing inquiring taxpayers with any information for six months after they have contacted the IRS. Resource constraints prevent CI from looking into every frozen refund, Olson said, meaning that some refunds remain locked for extended periods.



Lawyers specializing in low-income taxpayer advocacy said they were “dumbfounded” by the program. The QRP essentially targets “low-dollar wage earners,” as well as immigrants, according to Elizabeth Atkinson, a Virginia tax controversy lawyer who serves on the board of the Community Tax Law Project, a nonprofit group that represents low-income taxpayers in tax disputes.



“I think it’s ludicrous that they’re not sending these people a letter,” Atkinson said. “A frozen refund is a tremendous hardship to the clientele we deal with.”

Finance Committee Chair Chuck Grassley, R-Iowa, said he was concerned by Olson’s findings. Taxpayers should have the opportunity to challenge the IRS’s actions, he said.

“Taxpayers deserve notification of their refund status and a chance to tell their side of the story. It concerns me that the IRS appears to be freezing refunds and leaving taxpayers in the dark about it,” Grassley commented.