The Internal Revenue Service needs to take action to resolve millions of dollars in so-called “frozen credit accounts” that are effectively in a state of limbo, preventing some taxpayers from receiving their tax refunds, according to a new government report.
The report, from the Treasury Inspector General for Tax Administration, examines the accounts, which require special handling or await the occurrence of a pending future event. The IRS’s computer system uses special coding to identity these types of accounts. These situations are commonly referred to as freeze conditions. Taxpayer accounts in “credit” status (in which payments exceed assessments), and also coded with at least one freeze condition, are commonly referred to as frozen credit accounts.
If the freeze conditions are not adequately identified and resolved, TIGTA noted, IRS processing of taxpayer frozen credit accounts can be delayed and taxpayers can be adversely affected by delayed refunds or payments not applied to the proper tax modules.
Frozen credit accounts that are not adequately identified and resolved could also lead to barred assessments, collections and refunds due to the expiration of the applicable statute of limitations; unnecessary payment of additional interest to taxpayers for not issuing applicable refunds on a timely basis; or taxpayer burden if the delayed refunds or payments not applied to the proper tax module affect a taxpayer’s ability to meet their financial obligations.
The IRS has procedural requirements and standardized systemic checks in place to identify and resolve most frozen credit accounts. In addition, the IRS has conducted research projects to help identify ways to improve the processing of these accounts. However, TIGTA’s review found that further IRS actions are still needed to resolve some frozen credit accounts and some IRS computer systems need modifications to better reflect current procedures.
By reviewing samples of three different frozen credit conditions, TIGTA identified 156 individual tax modules with credits of $46.4 million and 128 business tax modules with credits of almost $1.6 billion for which the IRS did not take actions that could have resolved the credit tax modules sooner.
“By improving adherence to its processing procedures and making improvements to certain computer systems, the IRS can minimize resolution delays for many frozen credit accounts,” said TIGTA Inspector General J. Russell George in a statement.
TIGTA made 10 recommendations for the IRS to re-emphasize its existing procedures, establish and enforce new procedures, and make improvements to its computer systems. In response, IRS management agreed with nine of the 10 recommendations and plans to take appropriate corrective actions. However, IRS management stated that, due to resource constraints, they will not take corrective actions for two of the agreed recommendations related to improving computer systems. For the one disagreed recommendation, IRS management said it believes the current process will ensure that credits are properly resolved within the Offshore Voluntary Disclosure Program. TIGTA contended that it continues to believe that the IRS remains at risk for not resolving frozen credits in taxpayer accounts by not implementing all of the recommendations.
“As you acknowledge in your report, we have detailed procedures and standardized systemic checks to identify and resolve the conditions leading to a frozen credit in a taxpayer’s account,” wrote Karen Schiller, commissioner of the IRS’s Small Business/Self-Employed Division. “Most special conditions are resolved within a few months. And, as you also note in your report, we have initiated research projects to help identify ways to improve frozen credit processing. These projects have resulted in several recommendations, many of which we have implemented with the goal of returning frozen credit accounts to the normal compliance process and providing taxpayer refunds, when appropriate, in a more timely and efficient manner. However, you found that further action is needed to resolve some accounts with frozen credit condition and recommended we take several actions to improve our performance in resolving these accounts. We agree that there are additional actions we can take.”
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