IRS Commissioner Mark Everson ordered a review Tuesday of a tax fraud detection program criticized for freezing thousands of refunds without notifying taxpayers.
Everson said the tax agency will soon announce new procedures to advise taxpayers when a refund has been frozen. The agency will also revise its fraud screening procedures so that it withholds fewer refunds owed to innocent taxpayers.
"Honest taxpayers expecting a refund deserve to be treated fairly," Everson said.
National Taxpayer Advocate Nina Olson criticized the program in her annual list of the worst problems facing taxpayers. Her office, which helps taxpayers resolve disputes with the IRS, handles more frozen refunds than any other issue.
A study of those cases found no evidence of fraud in two out of three instances.
Lawmakers said the IRS needed to take more care to prevent innocent taxpayers from enduring long delays in receiving a refund, and Everson said critics raised legitimate complaints.
IRS criminal investigators use the Questionable Refund Program to screen tax returns for indications of fraud. It temporarily freezes refunds when it detects evidence of potential fraud.
The IRS tries to validate the taxpayers' right to a refund and lifts the freeze if no fraud is discovered. If the refund cannot be validated, the tax collectors permanently freeze the refund for further investigation.
In most cases, the tax agency does not inform taxpayers that they're suspected of fraud. A taxpayer wouldn't be told anything until six months after trying to find out what happened to an expected refund.
Refunds claimed on tax returns determined to be fraudulent remain frozen for a number of years until the IRS sees the taxpayer file a number of legitimate returns.
The tax agency said it's fighting a rising tide of refund fraud, which it now estimates to be more than $500 million a year. A significant portion involves false earned income tax credit claims, which can amount to $4,400 on a tax return, the IRS said.
Nearly 75 percent of the pool of frozen refunds studied by the taxpayer advocate were low-income families claiming the earned income tax credit, designed to reduce poverty among the working poor.
The IRS issues more than 100 million refunds each year, and the Questionable Refund Program withholds less than 1 percent for further scrutiny. The IRS said about 200,000 refunds are held longer than a week, but many of those can be held for months or years.