The Mysteries of Erroneous Refunds
Texas Tech University School of Law
Tax Notes, pp. 231-245, January 15, 2007
In FY2005, the IRS refunded about $227.6 billion to individual taxpayers. Given the huge amounts involved, even small error rates add up. For example, even if the IRS had an error rate of just 1% that would mean $2.2 billion erroneous refunds in FY2005. USA Today recently reported that the IRS let slip at least $200 million erroneous refunds from just the failure of one computer program during FY2005. Commissioner Everson agreed there was "little chance IRS will collect the bulk of the erroneously issued checks." As a result, tens of thousands of taxpayers receive the government's unintended largesse and wallow in their windfalls.
Prior law allowed the IRS to collect most erroneous refunds efficiently. Now it must write them off. This article tells the sad story of how the IRS lost its mojo and what must be done to get it back. In so doing it explores some critical concepts in tax administration theory and practice, notably the dual function of a tax assessment.
Part I explains how erroneous refunds occur and relate to the law of tax administration. The critical concept is that of assessment and its dual meaning in the law of tax administration. Part II reviews the legal doctrines governing their recovery and demonstrates how, as result of a contentious legal battle in the 1990's, current law leaves the IRS basically shooting blanks in trying to recover taxpayer windfalls. The TIGTA report focuses on ex-ante solutions precisely because the IRS ability to collect them efficiently ex-post is so compromised. Part III offers a simple legislative provision to help the IRS get its groove back. What is needed is a little statutory power pill to allow the IRS to interact firmly with taxpayers who try to keep money they should not have.
Number of Pages in PDF File: 15
Keywords: tax administration, erroneous refunds, refunds, tax gap, tax collection, administrative law, bureacracy, tax evasion
JEL Classification: H26, H20, K23, K34, K42
Date posted: December 7, 2006