The IRS should hold back more tax refunds owed to delinquent taxpayers. That's the message delivered to the nation's tax collection agency by the Treasury Inspector General for Tax Administration (TIGTA) in a new report (Expansion of the Delinquent Return Refund Hold Program Could Improve Filing Compliance and Help Reduce the Tax Gap, Ref. No. 2014-30-023, 5/14/14).
Specifically, TIGTA stated in the report that "holding refunds encourages taxpayers to take action and resolve their delinquent filing obligations earlier."
It's not exactly startling news. The IRS got the ball rolling back in 2012 when it collected almost $242 million from taxpayers as part of its "Delinquent Return Refund Program." Under this program, the IRS can hold back tax refunds of taxpayers for up to six months while it examines their tax returns from other years. If the investigation reveals that the taxpayer owes the IRS money, it can use the refund to offset the tax liability. Conversely, if the taxpayer doesn't owe the IRS any money—or the refund amount exceeds the tax liability—the IRS promptly makes good on the amount due.
Here are some of the other key findings in the TIGTA report:
- For 2008 through 2012, the program withheld, on average, 156,422 refunds per year. During the same period, the program secured an average of 64,222 returns from taxpayers per year.
- TIGTA reviewed two separate random samples of 30 taxpayer cases in which a refund was held and the refund hold was either manually or systemically released. The results showed that employees followed procedures when working cases and when refund holds were released.
- TIGTA also compared delinquent return data for refund hold cases with a specified dollar amount above the threshold criteria to cases with a specified dollar amount below the threshold criteria (i.e., refunds were not held for these cases). The analysis showed that 88 percent of delinquencies associated with the held refunds were subsequently resolved compared to less than one percent of delinquencies associated with cases for which refunds were not held.
- IRS management has considered expanding the program by lowering the dollar threshold, but hasn't done so because of limited resources. However, taxpayers who become compliant with their prior period filing requirements could remain compliant in future years and reduce the need for additional enforcement measures.
- The IRS has not established performance measures for evaluating the primary goal of increasing taxpayer filing compliance. Therefore, management doesn't have complete information about how well the program is doing or whether it will remain an effective tool for improving compliance over time.
TIGTA doesn't want the IRS to rest on its laurels. In the report, it recommends that the IRS consider opportunities to expand the program as resources become available and to develop specific performance measures for comparing actual results with management's goal of improving filing compliance. TIGTA sees expansion of the program as a way to boost revenue at a lower cost than using traditional collection methods.
How did the IRS respond to the report? It agrees in principle with the TIGTA recommendations. However, the IRS would not commit to any specific actions in expanding the program. It says it will delve into ways to benchmark results as more resources become available, in what is becoming a recurring theme of late.
How will this affect your clients? Undoubtedly, some will be encouraged to pay up past tax liabilities if their future refunds will be delayed. And that's really the whole idea, isn't it?