In 2012, the Internal Revenue Service (IRS), collected nearly $242 million as a result of the Delinquent Return Refund Hold Program. Under the program, the IRS can hold onto income tax refunds for up to six months while it investigates return delinquencies from other tax years.
If it turns out that a taxpayer owes money, the refund can be used to offset any balance due. If it turns out that there is no balance due or if the refund is greater than the amount due, the balance is released to the taxpayer.
In a recent report, Treasury Inspector General for Tax Administration (TIGTA) found that “holding refunds encourages taxpayers to take action and resolve their delinquent filing obligations earlier.” That finding was the result of a TIGTA audit to determine whether the program was an effective means of encouraging filing compliance. Statistically, when taxpayer refunds were held, taxpayers were significantly more likely to make an effort to resolve outstanding tax delinquencies.
According to IRS procedure, when a taxpayer meets the criteria for an offset, the taxpayer is notified and allowed time to resolve the delinquency. If the taxpayer does not respond in a timely fashion, the IRS will issue a 90-day letter. After the 90-day letter, the normal procedures apply: the taxpayer may either respond to the 90-day letter or file a petition in Tax Court. If there’s no response, collections actions proceed.
The result, according to TIGTA, has been impressive. The threat of offset has caused more taxpayers to file previously unfiled returns – and when taxpayers have not paid up, refunds have been seized to satisfy liabilities. Over the past five calendar years, the program held an average of 156,422 refunds per year. During that same time, refund offset transactions have averaged about $232 million per year, which works out to 26% of refund dollars held.
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