Poor families in IRS program audited for fraud

Jim Adams
1/25/06

WASHINGTON -- The Internal Revenue Service is on forked-tongue mode toward
Indian country.

One side of the face speaks pleasantly and appears kind. But get too close
and the face shows its other side, hideous and menacing. This is how the
IRS is behaving toward many of the country's poorest families, Indian and
others, in a program meant to help them out.

The program, called the Earned Income Tax Credit, is a descendant of the
famous "negative income tax" devised by the late Sen. Daniel Patrick
Moynihan in the late 1960s to replace aspects of the welfare system that he
argued were destroying low-income families. Qualifying poor families can
obtain refunds of all their income and social security tax payments, and
sometimes a little bit more. Over a year ago, the IRS changed some rules to
make it more available to American Indians. Several foundations launched a
publicity campaign to encourage tribes to use it.

But a recent report to Congress reveals that the IRS Criminal Investigation
division targeted this program far more than the dollar amounts would
justify.

The Taxpayer Advocate Service, an internal IRS watchdog, charged that some
1.6 million poor people over the past five years were subjected to what it
called an unfair and possibly illegal freeze on their refunds without
receiving notice. Furthermore, said the report, the computer program that
triggered the freeze also flagged the tax returns for future freezes, even
though the majority of the claims turned out to be legitimate.

Although no readily available statistics broke out the number of Indians
affected, another IRS official had earlier warned that quirks in the CI
computer program would unfairly flag reservation families. Christie Jacobs,
director of the Office of Indian Tribal Governments, told Indian Country
Today a year ago that the anti-fraud computer kicked out returns with large
numbers of dependent children or post office box return addresses, both
common on reservations. She said she had tried but failed to get the
computer program adjusted.

CI came in for unusually sharp criticism in the 2005 annual report of
National Taxpayer Advocate Nina E. Olson, released Jan. 10. Olsen wrote
that the CI's Questionable Refund Program procedures "clearly violate
taxpayer rights and may violate due process rights as well." She accused it
of inflating its claims of revenue savings. A "significant majority" of the
taxpayers with frozen refunds, Olson wrote, "were ultimately found not to
have committed fraud -- and the financial burden of the freezes on these
taxpayers was significant."

Olson said her service had studied a sample of complaints it had received
from taxpayers and found that CI ultimately agreed to release full refunds
in 66 percent of the cases and partial refunds in another 14 percent,
totaling a whopping 80 percent. Furthermore, the families under the freeze
earned a median income of $13,330 and the median refund was $3,519, more
than 26 percent of their yearly income. The average wait was eight and a
half months. "The financial impact on these taxpayers was substantial," she
said.

CI Chief Nancy J. Jardini provided a sharp rebuttal, accusing Olson of
overstating the problem. She said the report worked from a biased sample
and admitted that its numbers were unreliable. In an even sharper reply,
Olson said her numbers were the only ones available, since the CI didn't
even keep track of the automatic freezes.

She also ridiculed the CI claim that its program deterred criminal
behavior. "By the CI's own statistics," she wrote, "it determined fraud in
more than 118,000 cases in [fiscal year] 2004, yet over the past two years
it recommended only 442 persons for prosecution and persuaded a court to
sentence only 286 individuals." This was a conviction rate of 1.2 out of
1,000 accusations, she noted.

In the meantime, she said, CI devoted far fewer resources to far larger
areas of potential tax evasion, such as the cash economy. Other critics
have also charged the IRS with lessening its scrutiny of large corporations
while increasing its audits of individuals, and in this case, the poorest
families of all.

Both IRS officials noted, however, that the refund audits had been
specifically ordered by Congress.

The National Taxpayer Advocate service promises "free, independent,
confidential and personalized service" to persons who are suffering delays
or economic harm from unresolved tax problems. Its toll-free number is
(877) 777-4778. It also maintains a number of local taxpayer advocate
offices.

Its annual report and additional information are available online at
www.irs.gov/advocate.

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