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 taxpayer’s 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 management’s attention.

• Criteria used to release a "Million Dollar Refund Freeze" can prevent refunds of less than $1 million. For example, if the credit balance of an account with the freeze falls below $1 million, the freeze will remain in place until a manual refund is input.
• Follow-up transcripts are not generated when a "Million Dollar Refund Freeze" remains unresolved. For example, a transcript generates when the freeze is initially placed on the account. If the account is being audited, the credit is held pending the results of the audit. If the employee conducting the audit fails to input a manual refund to release the freeze once the audit is completed, the refund would remain frozen. No follow-up transcript will generate to alert the IRS employee of this condition.
• Although the "Million Dollar Refund Freeze" indicator is placed in the taxpayer’s account, it is not identified on a critical IRS computer display screen. As a result, IRS employees researching a tax account may not be aware that this freeze is preventing the credit balance from refunding. Therefore, instead of preparing a manual refund, they may leave the account as they found it, assuming that a refund will be sent automatically.

• Procedures for the Taxpayer Relations Branch Technical Unit, who is responsible for resolving "Million Dollar Refund Freezes," do not address how they should resolve these cases.

To ensure that the IRS does not incur additional interest expense, we recommend that service center management take the following actions:

• Modify the "Million Dollar Refund Freeze" indicator program in the IRS’ computer system to provide the option to release business taxpayer account credit balances plus computed interest that total less than $1 million (i.e., when the refund due drops below $1 million at any point in time).
• Periodically generate follow-up transcripts for business taxpayer accounts with a "Million Dollar Refund Freeze" present to ensure that unresolved accounts are reviewed and the freeze released.
• Ensure that the "Million Dollar Refund Freeze" is shown on critical IRS computer display screens so that IRS employees will be aware that this freeze is preventing the credit balance from refunding and take appropriate action.
• Enhance current IRS procedures to identify and expedite the resolution of a "Million Dollar Refund Freeze."

The above recommendations are listed on page 7 of the report.

Management’s 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. Management’s 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.