The Internal Revenue Service (IRS) has made significant improvements in taxpayer services, largely due to funding from the Inflation Reduction Act, yet continues to struggle with a backlog of claims related to a coronavirus pandemic-era tax credit program and delays in resolving certain identity theft cases, according to an independent watchdog report released Wednesday.
The report, while highlighting positive strides made by the agency, also underscores areas that still require substantial attention and resources.
Taxpayer experience has noticeably improved
“For the first time since I became the National Taxpayer Advocate in 2020, I can begin this report with good news: The taxpayer experience has noticeably improved,” wrote Erin M. Collins, the National Taxpayer Advocate, in her 2024 annual report to Congress.
She acknowledged that “the IRS has made major strides” with the help of the billions of dollars in multiyear funding, yet noted that “IRS service remains far from perfect,” indicating that while progress has been made, considerable challenges still lie ahead.
Despite the positive improvements, the report highlights service gaps, including prolonged delays in resolving claims from nearly half a million taxpayers whose identities were stolen by fraudsters who received a refund on their behalf.
The time taken to resolve these cases has increased from 19 months in 2023 to 22 months in 2024, according to the report.
In addition, the report pointed to substantial delays in the resolution of eligible Employee Retention Credit (ERC) claims submitted by employers who rely on these refunds to stay afloat.
Fraud plagues employee retention credit program
The ERC, designed to help businesses retain employees during pandemic-era shutdowns, has become a magnet for fraud. Scammers exploited the program’s complex eligibility rules to target small businesses, offering help applying for the credit for a fee, even if the businesses didn’t qualify.
The IRS announced a pause in accepting claims for the tax credit in September 2023 due to concerns about the influx of fraudulent applications, which caused a significant backlog, with approximately 1.2 million claims pending as of October 26, 2024, according to Collins’ report.
“Many claims have been pending for more than a year,” she noted.
IRS vows to address identity theft challenges
IRS Commissioner Daniel Werfel told Associated Press that “things are trending in a very positive direction in terms of our performance in taxpayer service,” but stated, “I view the identity theft issue as our largest current service gap.”
He said that the agency is observing higher numbers of theft victims overall than before the pandemic, partly because scammers are increasingly moving to online schemes.
Werfel added that the agency is adding more resources to tackle the issue, streamlining identity theft cases by differentiating between complex and simple cases in order to resolve taxpayer issues more efficiently.
Among its recommendations, the taxpayer advocate is urging Congress to broaden the US Tax Court’s jurisdiction to hear refund cases, give the Low Income Taxpayer Clinic program more financial flexibility to help taxpayers, and mandate that the IRS process claims for refund or credits in a timely manner.
The report emphasized that many of the IRS’s improvements, including quicker service and faster phone response times, were enabled by multiyear funding provided by Congress, which is now at risk of being cut.
The federal tax collection agency originally received an $80 billion infusion of funds under the Inflation Reduction Act.
However, a 2023 debt ceiling and budget cut deal between Republicans and the Democratic White House resulted in $1.4 billion being rescinded from the agency and a separate agreement to take $20 billion from the IRS over the next two years, diverting those funds to other nondefense programs.
Treasury Department officials are urging Congress to unlock another $20 billion in IRS enforcement money that is currently frozen due to specific legislative language.
Werfel stated that the boost in the IRS budget “has played an absolutely critical role” in improving taxpayer services, adding, “We’ve put the money to good use.”
In the event that Congress does slash the Inflation Reduction Act enforcement funding, Collins recommends that it avoid making cuts to taxpayer services and information technology, stating that Congress should not “inadvertently throw out the baby with the bathwater.”
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