IRS reviewing fraud system that froze refunds

IRS Commissioner Mark Everson ordered a review Tuesday of a tax fraud detection program criticized for freezing thousands of refunds without notifying taxpayers.

Everson said the tax agency will “in the very near future” announce new procedures to notify taxpayers that a refund has been frozen. The agency will also revise its fraud screening procedures so that fewer innocent taxpayers see their refunds unnecessarily frozen.

National Taxpayer Advocate Nina Olson criticized the program in her annual list of the worst problems facing taxpayers. Her office, which helps sort out disputes with the IRS, has seen a mounting number of people seeking help with frozen refunds.

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In a study of refunds handled in her office, Olson found no evidence of fraud in two out of three cases where refunds were withheld. The study raised concerns among some lawmakers who asked the tax collectors to review and restructure the program.

The Questionable Refund Program uses computer programs and other methods to screen tax returns claiming refunds for indications of fraud. It temporarily freezes returns that might be fraudulent.

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The IRS tries to validate the taxpayers’ right to a refund and lifts the freeze if no fraud is found. If the refund cannot be validated, it permanently freezes the refund for further investigation.

The IRS said it estimates refund fraud exceeds $500 million a year.