updated 10/14/2007 3:45:13 PM ET 2007-10-14T19:45:13

What if the government tried to give American taxpayers some of their money back, but the taxpayers didn’t seem to want it?

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That’s what happened this year, as taxpayers collected only about half the $8 billion the IRS expected to pay them in its phone tax refund, the most far-reaching refund in the agency’s history.

The telephone excise tax was created in 1898 to fund the Spanish-American War. After losing several lawsuits disputing the legitimacy of the tax, the IRS created a program to refund the 3 percent tax paid on long distance or bundled service from March 2003 to July 2006.

The tax agency estimated the one-time refund would affect 145 million to 165 million taxpayers.

But, as of August, the IRS had repaid just over half of the over-collected tax, according to the Treasury Inspector General for Tax Administration.

The inspector general report cited two main reasons for the lower-than-expected refunds:

  • Many taxpayers, following the advice of the IRS, didn’t want to bother searching for old phone bills to calculate exactly how much they were owed, and took the standard $30 to $60 refund instead, refunds that were based on the number of exemptions claimed.
  • Despite what the report said were generally good efforts by the IRS to communicate the program to taxpayers, many remained uninformed. As of June 9, about 87.6 million, or 71.5 percent, of the 122.6 million individual income tax returns filed had made a phone tax refund claim.

The report recommended that the IRS identify demographics that had relatively low rates of claims and provide additional information to these taxpayers on how they might still claim the refund.

Separately, the Government Accountability Office issued a report concluding the IRS loses money because of problems in managing its paper case files.

The GAO, the investigative wing of Congress, cited several District Court cases where the IRS lost more than $40,000 in revenue because it could not locate the case file.

It said the IRS could not find 10 percent to 14 percent of case files requested in two prior GAO audits, and that the IRS could not come up with 19 percent of the case files when the Treasury Inspector General, in an audit, asked for a random sample of tax records.

“This is not a new problem,” said Senate Finance Committee ranking Republican Charles Grassley of Iowa, who requested the study with committee Chairman Max Baucus, D-Mont. “The GAO’s findings should be an embarrassment to the agency.”

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