The Senate's top tax writer urged the Treasury Department on Thursday to restructure a tax fraud detection program and save innocent taxpayers from having their refunds frozen this spring.
Finance Committee Chairman Charles Grassley, in a letter to Treasury Secretary John Snow, said an Internal Revenue Service program that freezes tax refunds in cases of suspected fraud needs to be reformulated to burden fewer innocent taxpayers and capture more tax criminals.
Changes should be made quickly to assist taxpayers seeking refunds this spring, he said.
"As is so often the case with the work of the IRS it is a necessary balance between taxpayer rights and enforcement of the law," Grassley, R-Iowa, said in the letter. "My concern is that that balance has been lost in this case when the (program) is freezing refunds and the taxpayer is provided little, and sometimes zero, timely notice that they will not be getting a refund."
The nation's taxpayer advocate, who helps sort out disputes with the IRS, faulted the program in her annual report of the worst problems facing taxpayers. Taxpayer Advocate Nina Olson said the IRS freezes tens of thousands of tax refunds it deems questionable every year without telling taxpayers that they're suspected of fraud.
Her office fielded more appeals from taxpayers seeking help claiming frozen refunds than any other single issue during the last two years. A sampling of those cases showed no evidence of fraud in two out of three cases.
Grassley told the Treasury Department that taxpayers should at least be told, within 90 days, that the IRS has frozen an expected refund. The IRS currently does not tell a taxpayer anything about a refund designated as fraudulent for six months after the taxpayer contacts the tax agency inquiring about the refund.
IRS spokesman Terry Lemons said the tax agency had not yet reviewed the letter but would respond to Grassley as quickly as possible.
Separately, two Democratic senators raised questions about the program's impact on low-income workers who claim the earned income tax credit. Sens. John Kerry of Massachusetts and Barack Obama of Illinois asked the IRS for more information about affected taxpayers and urged that the program be temporarily suspended.