The Internal Revenue Service will revamp a fraud detection program and start notifying taxpayers this spring when freezing their refunds for further examination, the nation's tax collectors announced Monday.
The changes address criticism that the agency's Questionable Refund Program deemed thousands of refunds fraudulent and withheld the money without telling taxpayers. The IRS said taxpayers can expect to get notification as quickly as they would have expected to receive the refund.
Taxpayer Advocate Nina Olson, who raised concerns about the frozen refunds, said taxpayers will be given the opportunity to present evidence defending their refund claims. Olson's office helps taxpayers resolve their disputes with the IRS.
"The IRS has worked closely with my office to devise procedures that strike the proper balance between combating suspected tax fraud and protecting taxpayer rights, particularly the rights of honest taxpayers whose refunds are frozen in error," Olson said.
The IRS plans to review refunds frozen in the past and release them or notify taxpayers, and work to more quickly release valid refunds. IRS investigators also plan to refine their screening processes over the coming months so fewer innocent taxpayers see their refunds frozen.
The Senate Finance Committee's top Democrat, Max Baucus of Montana, said taxpayers need more details. "The IRS needs to explain just how they'll improve their filtering system and who will be watching to make sure the new systems work," he said in a statement.
Commissioner Mark Everson said the changes strikes a better balance between taxpayer rights and law enforcement. Senate Finance Committee Charles Grassley, who had faulted the program for shortchanging taxpayer rights, praised the changes.
"While we need to catch the bad guys, the good guys need to have their day in court," Grassley said in a statement.
The IRS estimates that the government loses more than $500 million a year in fraudulent refund claims.