January 24,2006

Grassley Praises IRS Steps to Fix Frozen Refunds Problem

M E M O R A N D U M

To: Reporters and Editors
Re: IRS announcement on frozen refunds
Da: Tuesday, Jan. 24, 2006

Today Internal Revenue Service Commissioner Mark Everson announced that he has directed
a review of the agency’s Questionable Refund Program to include notification procedures for refunds
and improvements to minimize the number of refunds frozen unnecessarily. Sen. Chuck Grassley,
chairman of the Committee on Finance, with IRS jurisdiction, has urged the IRS and the Treasury
Department to fix problems in the program. Last Friday, he wrote the Treasury secretary, seeking
a fix in time for this spring’s filing season. Grassley’s action came after the National Taxpayer
Advocate, who serves as an ombudsman for taxpayers with the IRS, faulted the IRS’ refund fraud
detection program in her annual report of the worst problems facing taxpayers. Taxpayer Advocate
Nina Olson said the IRS freezes tens of thousands of tax refunds it deems questionable every year
without telling taxpayers that they’re suspected of fraud. Grassley made the following comment on
today’s announcement.

“This is a good step. It’s responsive to a basic taxpayer rights issue. Taxpayers deserve
notification of their refund status and a chance to tell their side of the story. They deserve not to get
caught in a criminal dragnet unnecessarily. The IRS commissioner recognizes the need to balance
enforcement with fair treatment of taxpayers. It’s a challenge to keep that balance, and it’s important
to have a commissioner who can do it. I look forward to reviewing the new notification procedures
and steps to minimize the number of frozen refunds when they’re announced. I’ll continue to work
with the IRS to target tax fraud wherever it occurs, through individuals, groups, or businesses.”

The text of the IRS’ news release follows.

Commissioner Everson Calls for Improvements to Refund Fraud Program
IR-2006-19, Jan. 24, 2006

WASHINGTON - IRS Commissioner Mark W. Everson today announced that he has
directed a review of the Questionable Refund Program, which will include notification
procedures pertaining to frozen refunds.

"We will announce plans in the very near future to institute notification procedures as well
as significant processing improvements to minimize the number of taxpayers whose
refunds are frozen unnecessarily," Everson said in announcing the review.

The IRS noted that members of Congress and the National Taxpayer Advocate have
raised legitimate issues regarding the length of delay and lack of notification for refund
claims and have called for changes to the program.

“Claiming fraudulent refunds ultimately undermines the integrity of the tax system, but I
believe that appropriate notification should be given when refunds have been frozen,”
Everson said. “Honest taxpayers expecting a refund deserve to be treated fairly.”

The IRS established the Questionable Refund Program (QRP) to deal with the serious
problem of refund fraud, which has increased significantly in recent years. The IRS
estimates that refund fraud now exceeds a half-billion dollars a year. Congress has held
a number of hearings urging the IRS to devote additional resources and improve its
detection and prevention of fraudulent refunds, particularly those involving prisoners.
The typical fraudulent refund claim involves false income and withholding. A significant
portion includes false Earned Income Tax Credit claims of up to $4,400 per return.

According to the IRS, each year it receives more than 130 million individual income tax
returns and issues over 100 million refunds totaling over $200 billion. The QRP holds for
further scrutiny less than 1 percent of refund returns. Of the refund claims held beyond the
normal refund cycle, about 200,000 or 0.2 percent of all refund claims are held longer than
one week, and many refunds are held for a period of months or even years.

The IRS has often not sent notices to those taxpayers whose refunds are held because
some of these returns are subject to additional criminal investigation. Therefore, the
taxpayers may be unaware that their refunds have been frozen.

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