Refund Hold Notices Increase After IRS Algorithm Updates

Taxpayers and preparers report a rise in refund hold notices during the 2025 filing season after the Internal Revenue Service updated fraud detection and return screening systems. The updates are intended to combat refund fraud and protect taxpayer refunds. Still, they can also temporarily route legitimate tax refunds into additional IRS review before federal income tax refunds are released.

IRS Updates Screening Systems to Review Suspicious Refund Claims

The Internal Revenue Service reviews every original return before issuing individual income tax refunds or a tax refund check. During the 2025 filing season, updated fraud detection tools appear to have increased the number of refunds held while the agency verifies taxpayer information, such as Social Security numbers, account numbers, and Taxpayer Identification Numbers.

IRS systems compare return data against federal databases and prior filings to identify patterns linked to refund fraud. The automated checks may review business expenses, business assets, or information reported on a joint tax return. If inconsistencies are found, the return may enter an additional review process before taxpayer or current-year refunds are issued.

Return Review Systems Examine Filing Patterns

The IRS Return Review Program analyzes return data to identify suspicious patterns tied to refund fraud. The system compares filings against federal income tax refund history, delinquent returns, and filing requirements to determine whether further verification is necessary.

Returns that claim certain credits—such as the Additional Child Tax Credit or the Child Tax Credit—may also be subject to additional review because these credits can result in a larger additional refund.

Algorithm Updates Can Temporarily Increase Refund Reviews

When fraud detection models are updated, the systems can temporarily flag more legitimate returns. In some situations, a REFUND FREEZE or refund hold may occur while the IRS verifies details related to the taxpayer’s Social Security number or Taxpayer Identification Number.

Refunds may also be affected by a federal tax refund offset when a taxpayer owes debts handled by a child support agency or a state child support office. In those cases, the Treasury's Bureau of the Fiscal Service or the Federal Bureau of the Fiscal Service may reduce or redirect government payments, such as federal vendor payments or other obligations.

IRS Notices Explain Why Refund processing Is Delayed

The IRS sends official notices explaining when a refund hold occurs. Notice CP05 informs taxpayers that the agency needs additional time to verify income, withholding, or credits before releasing federal income tax refunds.

Other notices may appear if delinquent return modules or unfiled returns exist in IRS records. These checks help confirm filing compliance before issuing a refund check or tax refund check.

Identity Verification Letters May Require Action

Some taxpayers receive identity verification letters, such as Letter 4883C, when IRS systems suspect identity theft. Until the taxpayer confirms the information, the agency may pause processing of the return.

Taxpayers can contact the IRS using the toll-free phone number listed on the notice or other toll-free numbers, including the Collection toll-free number or CP 63 toll-free number. Assistance may also be available through the Taxpayer Advocate Service or Low Income Taxpayer Clinic.

Taxpayers Should Confirm Notices Before Responding

Taxpayers who receive a refund hold notice should read the instructions carefully and verify that the communication comes from the Internal Revenue Service before sharing information. Some issues may involve filing delinquency, payment compliance, or verification tied to delinquent returns.

If problems persist, taxpayers can seek help through the Taxpayer Advocate Service, which assists individuals experiencing delays in the timely processing of federal and other taxpayer refunds.

Sources

• Internal Revenue Service: “The IRS alerts taxpayers of suspected identity theft by letter.”
• Internal Revenue Service: “Return Review Program Privacy Impact Assessment”
• Internal Revenue Service. “Understanding Your CP05 Notice”
  

‍By William Mc Lee, Editor-in-Chief & Tax Expert—Get Tax Relief Now