The Internal Revenue Service's taxpayer advocate, Nina Olson, told Congress in the annual report released today that tax refunds sought by hundreds of thousands of poor Americans were denied by the IRS and blocked for years to come. This was done because a computer program run by the criminal investigation division of the IRS selected the returns as part of the questionable refund program. Olson, whose staff looked at a sample of suspected returns, found only one in five to be questionable. Even worse, many of the taxpayers -- whose incomes averaged $13,000 annually -- were not ever told they were suspected of fraud.

Many of the filers were seeking the earned income tax credit (EITC), which is a benefit for the working poor. The average refund sought was $3,500 (compare this amount with the average $103,000 each taxpayer with an income above $1 million received last year thanks to the president's tax cuts). Olson found that of the taxpayers who pressed for their refunds, 66 percent were due all the money they sought, or even more than they had asked for. Perhaps most strikingly, Olson reported to Congress that the IRS is devoting many more resources towards looking into the questionable refunds pursued by the poor -- a $9 billion problem at most -- and far fewer resources towards the $100 billion problem of unreported incomes from many small businesses who deal only in cash.

New York Times: I.R.S. Limited Tax Refunds of Poor, Congress Is Told (1.10.2006)

Washington Post: IRS Froze Refunds, Study Says (1.11.2006)