When The IRS Is Your Friend

When Mary Graney paid her taxes late, she sent along a $100 check for the penalty and the interest due. What she didn't expect was to get the $100 right back from the IRS - thanks to a quirky tax law, CBS News Correspondent Ray Brady reports.

"I was surprised, pleasantly so," Graney says.

Mary Graney got the surprise because she lived in right place at the right time.

The right place: a California county battered by El Nino. The right time: l997. President Clinton declared her county and 47 other California counties federal disaster areas.

In Washington, Congress wanted to help those affected by the disaster. The solution: Forgive the interest and penalties for any taxpayer who filed late from federal disaster areas, and sent what they paid right back to them.

Mary Graney did file four months late, but, "I had no damage done," she says.

Neither did the retirement community where she lives.

"We escaped without any slides or floods or water damage," she says.

Since l997, in California alone, nearly 700,000 taxpayers have so far gotten at least $25 million in penalties and interest back - some of those checks as high as $4,000 each - whether they had damage or not. Congress, in its haste to help, ordered checks sent to anyone living in a disaster area zip code.

The cynical, or course, might say this was a politician's dream: sending money back to taxpayers.

Congressman Bob Riley sponsored the bill that made disaster tax relief permanent in the tax code after a devastating tornado ripped though his Alabama district.

Riley says he wouldn't hesitate to sponsor the same bill again.

"We had to do something as quickly as possible," Riley says.

But, to send money to people who had no damage at all?

"It was typical of the way we enact tax policies," says Gene Speurle, a congressional watchdog who tracks tax laws.

Speurle says such legislation is not well researched and that the disaster relief provision was slipped into the measure "like a lot of small provisions."

So, says Speurle, Uncle Sam is losing a bundle: The number of counties declared disaster areas is ballooning - nearly 2,000 on the books since Congressman Riley's law took effect.

Of the legislation, Riley says "there may be a way that we can tweak this and improve it somewhat."

But until they do a lot of people like Mary Graney will be cashing those IRS checks, proving once again that, especially when it comes to tax policy, haste makes waste.

©1999 CBS Worldwide Corp. All rights reserved