Poor timing

January 11, 2006

This report is making the rounds.

Tax refunds sought by 1.6 million poor Americans over the last five years were frozen and their returns labeled fraudulent, although the vast majority appear to have done nothing wrong, the Internal Revenue Service’s taxpayer advocate told Congress yesterday.

A computer program identified the refund requests as suspect and automatically flagged the taxpayers for extra scrutiny for years to come, the advocate said in her annual report to Congress. These taxpayers were not told that the I.R.S. criminal investigation division suspected fraud.

The advocate, Nina Olson, said the I.R.S. devoted vastly more resources to pursuing questionable refunds sought by the poor – which under the highest estimate is $9 billion – than to the $100 billion in taxes not paid each year by people who work for cash and either fail to file tax returns or understate their income.

As for the suspected fraud in refund requests, Ms. Olson said her staff sampled the suspect returns and found that 66 percent were entitled to the amount sought or more. Another 14 percent were due a partial refund. She expressed doubt that many among the remaining 20 percent had committed fraud.

“At a minimum, this procedure constitutes an extraordinary violation of fundamental taxpayer rights and fairness,” Ms. Olson wrote, adding that it “may also constitute a violation of due process of law.”

Her staff’s sample of frozen returns found that the average reported income was about $13,000 and the refund due was about $3,500.

About three-quarters of those affected were employed parents who applied for the earned-income tax credit, under which all income and Social Security taxes can be returned and, in some cases, a payment made.

Which makes the timing of this corporate welfare education scheme* rather unfortunate.

This week a consortium of public and private nonprofit groups began trying to get employers in the Tampa area to encourage low- and middle-income workers to take advantage of the earned income credit this tax season. The credit can reduce the amount of taxes owed. Taxpayers can qualify for between $399 and $4,400 in tax credits.

On Tuesday, the consortium, called the Prosperity Campaign, approached employers in the West Shore business district, where an estimated 4,000 businesses are situated.

“There are lots of entry-level workers we need to reach,” said Ron Rotella, executive director of the Westshore Alliance, a business group that plans to help educate workers about the overlooked credit.

Daley says she hopes the campaign is a success. Bosses benefit if workers are educated about the tax credit.

“It gives you a much better employee,” Daley said. “I may work harder because my boss appreciates me.”

Uh, yeah… my boss appreciates me to the point of underpaying me so severely that the government feels obligated to supplement my meager pay.

*Government subsidized payroll in the form of a tax credit that employers are touting as extra income.

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