WASHINGTON (AP) - Thousands of taxpayers overpaid $25 million in income taxes that should have been credited to their accounts or refunded by the Internal Revenue Service, according to an independent audit that cites computer problems as the main culprit.
Thousands more individuals, families and businesses forfeited their rights to refunds or credits, or were at risk of doing so, that totaled $335 million. These taxpayers failed to file late tax returns in time for legal deadlines to qualify for the money.
The IRS says it has returned or credited the money owed and is fixing the problem. Still, some taxpayers mistakenly got IRS notices demanding taxes already paid or were forced to deal with IRS liens.
The audit by the independent Treasury Inspector General for Tax Administration, David C. Williams, examined 426,000 tax payments, totaling $360 million, from 240,000 taxpayers that had been transferred as of March 1999 to the IRS Excess Collections Account. Payments are deposited into this account when the IRS is unable to match them with a tax return, usually because it is late.
Of the $360 million, the audit found that:
-About $25 million, or 29,820 payments, immediately should have been refunded or credited to taxpayers who filed returns late but within the legal requirement of generally three years after the initial due date - usually April 15 of a given year. The audit did not break down how many taxpayers that involved.
-Taxpayers forfeited $162 million, or 191,700 payments, because they did not get a return to the IRS within the three-year window necessary to claim a refund or to credit the payment toward another tax year.
-No tax return had been filed for $173 million, or 204,480 payments. But these taxpayers still could get their credit or refund if they took action quickly.
Tax law requires a taxpayer to file a claim for a credit or refund of an overpayment within three years after a return is filed or two years after the tax was paid, whichever is later. If no tax is due, the claim must be made within two years of the payment.
The chief culprit is the main IRS computer, which is not linked directly to computers in the agency's 10 service centers, where records of payment transfers to the excess account are kept.
When a late return is filed, the computer containing a taxpayer's main account has no record of the previous payments and the IRS sends out a notice demanding the money. ``This control weakness made it appear that these taxpayers had underpaid their tax liabilities,'' the auditors found.
An IRS study from 1995 that was cited by auditors said it was ``unproductive'' to spend time tracking down people who failed to file tax returns if they did not owe taxes and that agents sometimes transferred payments to the excess accounts to reduce the number of unresolved cases.
As a result, the auditors found that ``many taxpayers received inaccurate or erroneous balance due notices, sometimes taxpayers made additional payments in excess of their tax liabilities and, in a few instances, taxpayers were subjected to federal tax liens.''
IRS Commissioner Charles Rossotti responded in a letter that computers are being modified to prevent transfers into the excess payment account until the three-year refund limit has expired.
Rossotti also said the IRS will send ``periodic letters to taxpayers with credits to remind them to file a return to receive a credit or refund.''
He questioned the $25 million in credits and refunds estimated by the audit, saying an examination of two of the 10 service centers uncovered 1,398 payments due totaling about $1.7 million. If that rate held for the other centers, Rossotti said, the total credited back to taxpayers would amount to about $8.3 million.
The auditors said the discrepancy could be attributed to major differences between service centers in crediting taxpayer overpayments and responses by many taxpayers to inaccurate balance notices they received last year.
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