The Internal Revenue Service is spending millions in interest on tax refunds that have been improperly frozen, according to a new report by the Treasury Inspector General for Tax Administration, which noted that the IRS's computer system automatically places a freeze on taxpayer refunds greater than $10 million to prevent it from automatically issuing a refund or offsetting another tax liability. The freeze is intended to alert IRS employees that a large-dollar refund, if appropriate, must be issued manually. Frozen refunds that are not manually processed in a timely manner are considered to be "improperly frozen."
TIGTA issued previous reports in 1999 and 2002 that identified the problem. In the new report, TIGTA noted that fewer taxpayer accounts are being improperly frozen now, but the federal government is still paying millions of dollars in interest on the ones that are still being frozen. The IRS is required to pay interest to taxpayers if a refund is not paid within 45 days from the date a valid and timely return is filed.
In its follow-up review, TIGTA identified 49 accounts with refunds not released in a timely manner, resulting in $62.9 million in additional interest payments. The IRS was already taking steps to release the freeze on 12 of these accounts, but the 37 other accounts identified by TIGTA could have remained unnoticed, resulting in an additional $5.92 million in interest each year.
TIGTA also found that the computer reprogramming done by the IRS in response to the inspector general's previous audits was insufficient, and recommended that the IRS reprogram its computers to properly alert employees about frozen refunds, revise its procedures for processing frozen refunds, and ensure that training materials for those involved with frozen refunds include such procedures.
IRS officials agreed with TIGTA's recommendations and have taken or plan to take appropriate corrective actions.
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