During the 1999 Filing Season, the Internal Revenue Service (IRS) refunded more than $133 billion to individual taxpayers who overpaid their tax liabilities. When taxpayers inform the IRS that they have not received their refund checks, the IRS should address their claims promptly. The IRS provides this service by coordinating with the Department of the Treasury’s Financial Management Service (FMS). While the IRS processes tax returns, the FMS issues refund checks to taxpayers.

A taxpayer may report a missing refund check to the IRS by calling its automated computer system, sending a written complaint, or speaking with a customer service representative. The IRS then sends a refund trace request to the FMS to determine whether the check has been cashed. If the check has not been cashed, the FMS stops payment and the IRS re-processes the refund. If the check has been cashed, the FMS sends the taxpayer a form so he/she may file for a replacement. If the FMS cannot process the trace because of incorrect or incomplete information, it returns the request to the IRS.

We evaluated the effectiveness of the IRS’ process for timely and accurately resolving taxpayer claims of missing refund checks. To determine this, we reviewed claims processed at 2 of the IRS’ 10 customer service centers. (We did not evaluate the process used by the FMS to resolve missing refund checks.)

The IRS did not provide adequate customer service to all taxpayers who reported missing refund checks. Improvements are needed to ensure the IRS:

• Processes all taxpayer claims effectively.
• Communicates with taxpayers to inform them of delays in resolving their claims.

These conditions occurred primarily because employees did not always follow procedures for processing refund traces and, in some instances, procedures were inadequate. A more comprehensive management information system (MIS) is also needed to allow the IRS to evaluate this program’s performance.

Our analysis at two customer service centers showed that claims were not processed in a timely manner.

• Of the 10,319 claims received through the automated computer system, 95 percent (9,838) were listed as overage on IRS reports. These claims required processing within established Telephone Routing Interactive System time frames that ranged between 14 to 60 days and included $1.3 million in suspended replacement refunds affecting 497 taxpayers. This occurred because IRS procedures did not require employees to periodically review computer reports showing the age of cases.
• Of the 6,452 claims received in the Refund Inquiry Units through personal taxpayer contact and administrative request, we determined that 29 percent of these claims were attributable to the IRS not timely performing necessary follow-up to resolve situations such as the following:
• Correcting erroneous information provided to the FMS.
• Following up with the FMS when its actions are overdue.
• Resolving replacement refunds that are suspended in IRS processing.

The IRS’ MIS does not provide national information to monitor the volume or the age of all taxpayer inquires. As a result, IRS executives cannot effectively evaluate the overall effectiveness of refund claim processing at all 10 customer service centers.

The IRS did not always provide taxpayers with periodic updates on the status of their claims. Fourteen percent of the taxpayers (28 of 198) we sampled received acknowledgement letters indicating their case would be processed within 90 days. However, the IRS did not advise them when their cases were not processed within this time period.

To ensure taxpayer claims of missing refund checks are effectively resolved, we recommend the IRS perform a series of actions that include revising its refund trace procedures, more timely monitoring refund trace actions, and advising taxpayers when there are delays in processing their claims. The IRS should also strengthen its oversight of this program by developing and using a comprehensive MIS. This system should evaluate the program’s results from a national level and summarize the age of claims from the IRS received date.

Management’s Response: The IRS agreed that improvements are needed in processing all taxpayer claims effectively and in communicating with taxpayers when their refund claim is delayed. The IRS has taken immediate actions to enable the customer service centers and Headquarters to more effectively monitor timeliness and overage refund claims, including the development of a national inventory report to capture program results and the revision of the Internal Revenue Manual program guidelines. The IRS also agreed that our audit recommendations will provide benefits to tax administration by decreasing taxpayer burden and by increasing taxpayer entitlements to timely replacement refunds.