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.
The results weren’t all about offset dollars: for 2011 and 2012, taxpayers whose refunds were held paid up an additional $1.2 million after delinquent returns were filed. From 2008 to 2012, an average of 64,222 delinquent returns per year were filed by taxpayers affected by the program.
What does all of this mean? TIGTA concluded that the program was an effective way to increase compliance and collections with relatively few resources – something IRS is familiar with these days. As a result, TIGTA suggested that the IRS expand the program.
IRS management has agreed with the idea of growing the program without offering specifics. One area of concern, noted TIGTA, is that the IRS doesn’t have any established benchmarks for the program: TIGTA wants to see some measuring sticks. Without those benchmarks, there’s no easy way for IRS management to monitor how well the program is actually performing.
What does this mean for taxpayers? Those taxpayers that have liabilities – or have failed to file past returns – may have cause to worry. And that is exactly the point of the program…