The Internal Revenue Service’s taxpayer advocate recently revealed
that the agency froze tax refunds owed to hundreds of thousands of poor Americans,
labeling them fraudulent. Refunds were withheld by the IRS without notifying
taxpayers that their claims were under review, thereby eliminating any opportunity
to respond to the agency.
The taxpayers, whose average gross income was $13,300, were seeking
the Earned Income Tax Credit (EITC). The credit potentially returns all the
income and Social Security taxes withheld from paychecks. The average delayed
refund was $3,519, which signifies that under the rules for obtaining the credit,
the vast majority of those flagged as ‘tax cheats’ were single parents
or married couples with children. The withheld amount represents a quarter of
the annual income of the families.
“This is the biggest check of the year for these families. It creates
a significant hardship when 25 percent of your income is held,” Julie
Kruse, director for advocacy for the Center for Economic Progress in Chicago,
told the Los Angeles Times. Initially enacted in 1975, the EITC was expanded
during the Reagan administration in the late 1980s following the elimination
of a vast array of social programs. After Medicaid, the EITC is the second largest
program benefiting the poor.
Even in cases where the IRS paid out returns, recipients were forced to wait
nearly a year due to the Bush administration’s crackdown on those applying
for the EITC.
“The people most in need of tax fairness have been targeted for no other
reason than that they are low income. There is absolutely no basis for withholding
these refunds and to do so constitutes an extraordinary violation of fundamental
taxpayer rights and fairness,” David Marzahl, executive director for the
Center for Economic Progress, told CNSNews.com.
For five years, the Criminal Division within the IRS flagged tax returns filed
by 1.6 million people as fraudulent. In the last year alone some 200,000 returns
were branded as fake. Conversely, during the same period taxes were significantly
reduced on households making over $200,000.
The taxpayer advocate, Nina E. Olson, who heads an agency created within the
IRS to handle taxpayer complaints, spoke before a Congressional hearing on January
10. She said that nearly two-thirds of the taxpayers whose refunds were delayed,
a delay that averaged eight months, were entitled to receive their full refund.
Another 14 percent were due a partial refund. It was also questionable as to
whether the balance of the returns were fraudulent. She complained that future
tax returns from those whose refunds have been flagged are frozen for years
IRS officials present at the hearing arrogantly defended the practice, stating
that more “innocent taxpayers” would have complained if they were
legitimately owed the refund. Besides having never been told their refunds were
frozen, many of those affected work several jobs and are immigrant workers,
with most not aware of the taxpayer advocate law.
Due to the complicated and cumbersome nature of tax filing, millions of American
workers eligible for the credit never claim it. Unlike wealthier layers of society,
they cannot afford to pay accountants or independent agencies to assist them
with tax preparation, nor do they have the resources to fight unjust practices
carried out by the IRS.
In her report to Congress, Olson also criticized the IRS for reducing the number
of returns the agency prepared for taxpayers who seek assistance, reducing the
percentage of calls IRS telephone assistants answer and substantially reducing
taxpayer education for small businesses.
The taxpayer advocate’s office began its review after receiving 28,500
complaints last year, nearly double the prior year’s total, from taxpayers
whose refunds had been frozen. Ms. Olson revealed that the IRS earmarked a great
deal more resources to pursuing questionable refunds filed by the poor, which
she points out could not have involved more than $9 billion, than to the estimated
$100 billion problem related to unreported incomes from small businesses that
deal only in cash, many of which do not file tax returns.
“Clearly, the amounts at issue and the lengthy delays cause significant
hardship for many of the taxpayers,” Olson said in her report. Diana Leyden,
who teaches law at the University of Connecticut and directs a tax clinic that
helps low-income filers, said, “We’ve had cases that drag on for
two or three years.”
In what amounts to criminalizing the poor, the IRS has devoted an abundance
of resources in targeting low-income families while letting wealthier taxpayers
off the hook. In recent years, the IRS has sharply reduced the number of audits
it conducts on individuals making over $100,000 a year. Between the years 2000
and 2004—the last time data was provided—1.15 percent of individuals
making over $100,000 were audited compared with 1.36 percent of those making
$25,000 or less.
Since the January 10 hearing, which received widespread coverage in the media
and was criticized on a number of web sites that expose the unfair nature of
the government’s tax policy, the IRS has said it will begin notifying
taxpayers whose refunds were being frozen.
At the same time, IRS Commissioner Mark W. Everson refused to disclose any
details about how such a notice would be delivered and whether it would include
previously frozen returns. Clearly, the IRS response to the exposure indicates
that the practice of scrutinizing the returns for individuals who file for the
EITC will continue.
Further, since 2004 the IRS has refused to hand over data to the Transactional
Records Access Clearinghouse (TRAC) about how it enforces the nation’s
tax laws. Susan B. Long, a professor of Management Information and Decision
Sciences at Syracuse University and co-director of TRAC, recently filed a lawsuit
demanding the IRS comply with a longstanding court order to provide the requested
information. TRAC is a research organization that provides the public with detailed
information about the operation of hundreds of federal agencies, including the
That the IRS favors wealthy taxpayers while penalizing the poor is demonstrated
by reports based on government statistics available on the TRAC web site.
For example, the April 2000 IRS report cited data showing that under the Clinton
administration tax collectors audited the poor at a higher rate than the rich.
In addition, the 2004 report found that business and corporate audits were substantially
down. In 2005, agency data showed that while the largest corporations controlled
90 percent of all corporate assets and 87 percent of all corporate income in
fiscal year 2004, only one out of three corporations had been audited.
Elaborating on the reasons for the lawsuit, Long said, “It should come
as no surprise that none of these findings were announced by either the IRS
or the administration in power at the time of their publication. Furthermore,
all of these and many other similar findings were based on the kinds of data
that the IRS has been unlawfully withholding from TRAC and the American people