IRS pays millions in interest for delays in processing high-dollar refunds

The Internal Revenue Service failed to review large taxpayers refunds that were automatically frozen by the agency's computer system, resulting in nearly $63 million in additional interest the government had to pay, according to a report released by the Treasury inspector general for tax administration on Thursday.

At the end of fiscal 2008, an IRS computer automatically froze 152 tax refunds that exceeded $10 million each so the agency could review the payments. Of those accounts, 49 payments, totaling $620 million, were not issued in a timely fashion, costing the government $62.9 million in additional interest owed to taxpayers, according to the report.

The IRS must manually issue refund checks that exceed $10 million because its computer system is not programmed to write checks with 11-digit dollar amounts, and the agency is required to review high-dollar refunds for possible errors that employees might have committed in approving the refund.

IRS officials already were taking steps to release freezes on 12 of the 49 accounts by issuing refunds to the taxpayers before being alerted by the inspector general and have since released the remaining 37 refunds.

"Taking these actions is important because we estimate that if the 37 taxpayer accounts had continued to go undiscovered, an additional $5.94 million in interest would have been owed to the taxpayers each year, or $29.7 million over five years," the auditor reported.

This is not the first time the IRS has been notified of problems associated with freezing high-dollar refunds. In September 1999 and again in March 2002 the inspector general recommended that the computer periodically alert employees to frozen refunds and release the freeze if the credit amount went below the $10 million threshold caused by payment transfers or adjustments. The inspector general also recommended the IRS create processing procedures and provide training for employees responsible for large refunds.

"In this follow-up review, we found fewer accounts with the large-dollar refund freeze," the auditor noted. "Nevertheless, the amount of interest the IRS continues to owe taxpayers with improperly frozen refunds is substantial because it has yet to implement our recommendations from the prior reviews."

The IRS said it discontinued the periodic alert of frozen accounts because it duplicated an existing alert process. The inspector general, however, found that the alternative alert system only signals employees about processing issues unrelated to holds on high-dollar refunds.

The inspector general recommended the IRS implement its prior recommendations, which the agency said it is doing.

"It is important to recognize that the number of improperly frozen large-dollar refunds is very small when compared to the millions of refunds the IRS successfully processes each year," the inspector general reported. The IRS issued 121 million refunds totaling $330 billion in fiscal 2008.

"Nevertheless, this is a long-standing condition that can adversely affect taxpayers and negatively impact the IRS' mission of providing top-quality customer service in addition to costing the federal government millions of dollars in additional interest," the auditor concluded.