I've written about the absurd logic people use to justify their annual interest-free loans to the federal government by claiming insufficient exemptions. Such a loan is a stupid financial plan, but this story reveals that it might be even dumber:

The IRS has frozen refunds for hundreds of thousands of low-income taxpayers without telling them they're being investigated for tax fraud or giving them a chance to defend themselves, the IRS taxpayer advocate said Tuesday.

In a blistering report to Congress, Taxpayer Advocate Nina Olson said complaints about unpaid tax refunds have soared more than 400% since 2002. Sixty-six percent of those who complained were entitled to a full refund, an investigation by her office found. An additional 14% were determined to be eligible for a partial refund, Olson says.

The issue raises "serious questions" about the protection of taxpayer rights and might constitute a violation of due process of law, Olson charged in her report.

More than three-quarters of the returns investigated were for low-income families who claimed the earned income tax credit, a program that provides tax refunds for the working poor. Delayed refunds cause a "significant hardship" for these taxpayers, the report said.

Without ignoring the appalling implication of what the IRS is doing, I don't doubt those refunds are important to the working poor. I know people who use a tax refund as a self-imposed "savings" program, allowing them to pay bills they know they'll be too irresponsible to pay throughout the year. I also know people who treat their tax refund as "found money". Neither reason is smart. Personally, I take pride in paying the minimum amount due throughout the year. I don't happily write a check to the IRS every April 15th, but I accept that it's the smartest way to pay. This new revelation only furthers the wisdom of not forming a financial strategy around a tax refund.

The lesson is this: claim enough exemptions to keep your money through the year. Don't let the IRS treat your money like Eric Cartman treats Kyle's money.

UPDATE I: Kip from A Stitch in Haste provides an excellent clarification of my over-simplified, unstated tax liability assumptions. The lesson: I'm smart enough to run my own taxes. But you shouldn't rely exclusively on me, except about the refund. Get a refund, but make it really small.

UPDATE II: The IRS announced that it will notify taxpayers whose refunds are frozen. It's an appropriate change, but it shouldn't have required public attention to occur. Regardless, the lesson remains that you should not use the United States Treasury as your bank of choice for extra tax dollars during the year.

(Hat tip: John Cole)