TREASURY INSPECTOR GENERAL
FOR TAX ADMINISTRATION
CONTROLS SHOULD BE STRENGTHENED OVER BUSINESS TAXPAYER ACCOUNTS WITH FROZEN MILLION DOLLAR REFUNDS
Reference No. 199940057
We performed a limited review to determine whether the Internal Revenue Service (IRS) was properly releasing the automatic hold placed on business taxpayer accounts when a credit balance reaches an amount that would cause a refund of $1 million or more. This automatic hold is called a "Million Dollar Refund Freeze" and the affected refunds are known as "frozen refunds." This hold also results in a "Million Dollar Refund Freeze" indicator being placed on the taxpayerís account in the IRS computer systems to alert IRS employees that this situation exists. The employee should review the account to ensure all obligations have been satisfied and prepare a refund for the remaining credit.
We conducted the review at the Memphis Service Center, one of the ten IRS sites which processes tax information. We evaluated accounts in all ten IRS processing sites to determine the additional interest the IRS paid on these accounts because the refunds were not issued timely. As of April 4, 1998, 411 business taxpayer accounts had a "Million Dollar Refund Freeze" indicator. Credits on these accounts totaled approximately $2.4 billion.
Our limited analysis showed that the IRS could provide better customer service and reduce interest expense by ensuring that frozen million dollar refunds are properly and timely released (the freeze removed and the taxpayer refunded his/her credit). We determined that the IRS incurred additional interest expense of approximately $17.5 million on 44 business taxpayer accounts that had a "Million Dollar Refund Freeze" present and manual refunds of $50,000 or more.
We reported these conditions in a memorandum to the Executive Officer for Service Center Operations (EOSCO). This executive is responsible for the effective operations of all ten IRS service centers. We also provided the EOSCO with a listing of 411 business taxpayer accounts with a "Million Dollar Refund Freeze" present on their account as of April 4, 1998.
His office began immediate corrective action to resolve these freezes, and developed new processes to identify and expedite the resolution of frozen refunds. As a result, service center management has resolved, or is in the process of resolving, the remaining accounts that were identified. These accounts may also result in additional interest expense, above the $17.5 million which we identified, to the IRS.
The following issues contributed to this problem and warrant service center managementís attention.
Summary of Recommendations
To ensure that the IRS does not incur additional interest expense, we recommend that service center management take the following actions:
The above recommendations are listed on page 7 of the report.
Managementís Response: IRS management provided an adequate, detailed response to our memorandum, and agreed that current controls over "Million Dollar Refund Freezes" on business taxpayer accounts do not ensure that refunds are properly and timely released. IRS management also agreed with our recommendations, as well as additional recommendations provided by the service centers. Follow-up transcripts will be generated monthly. The "Million Dollar Refund Freeze" will be shown on a critical IRS computer display screen and IRS procedures will be enhanced. Managementís complete response to the memorandum is included in Appendix V of this report.
IRS did not provide a response to our draft report dated December 19, 1998.