Watchdog: IRS boosts taxpayer services, lags on ID theft resolution

TL/DR –

The IRS has made significant improvements in taxpayer services due to the Inflation Reduction Act, but continues to struggle with processing claims from a pandemic-era tax credit program and resolving certain identity theft cases, according to a report by the National Taxpayer Advocate. The report also identified service gaps such as long delays in resolving claims from identity theft victims and processing Employee Retention Credit (ERC) claims. Issues with the IRS budget, including the potential reduction of funds from the Inflation Reduction Act, could impact future improvements.

IRS Improves Taxpayer Services but Faces Challenges with Identity Theft: Watchdog Report

The IRS has made significant improvements in taxpayer services through the Inflation Reduction Act, as per an independent watchdog report. However, it continues to struggle with processing claims from a pandemic-era tax credit program and resolving specific cases of identity theft.

“The taxpayer experience has improved significantly,” Erin M. Collins, the National Taxpayer Advocate, acknowledged in her 2024 annual report to Congress. She commended IRS’s strides facilitated by multiyear funding, despite stating, “IRS service remains far from perfect.”

Continuing service gaps include extended delays in resolving claims from almost half a million taxpayers whose identities were stolen by fraudsters claiming refunds. These delays have increased from 19 months in 2023 to 22 months in 2024, the report reveals.

Resolution of eligible Employee Retention Credit (ERC) claims also face substantial delays. The ERC, intended to aid businesses maintain staff during pandemic shutdowns, became a fraud magnet due to complex eligibility rules.

Given rising fraudulent claims, the IRS postponed accepting claims for this tax credit until 2024. The IRS currently faces a backlog of about 1.2 million claims, many pending over a year, as of October 26, 2024, according to Collins.

IRS Commissioner, Daniel Werfel, affirms the upward trend in taxpayer service performance, but recognizes identity theft as a significant service gap. Scammers are increasingly targeting victims online, resulting in higher theft numbers since the pandemic.

To mitigate this, the IRS plans to allocate more resources to identity theft cases and streamline processes to resolve taxpayer issues promptly.

Collins recommends Congress to expand the U.S. Tax Court’s jurisdiction to hear refund cases, increase financial support for the Low Income Taxpayer Clinic program, and mandate timely processing of refund or credit claims by the IRS.

IRS improvements, including faster phone response times and service, have been facilitated by multiyear funding from Congress. However, this funding risks being slashed.

Originally, the IRS received an $80 billion infusion under the Inflation Reduction Act. However, a 2023 debt ceiling and budget cut deal resulted in $1.4 billion rescinded and a separate agreement to divert $20 billion from the IRS to other nondefense programs over two years.

Treasury Department officials now urge Congress to unlock another $20 billion in IRS enforcement money currently tied up in legislative language.

Werfel recognizes the significant role of this budget increase in improving taxpayer services, assuring that the funds have been well-utilized. Collins advises against cutting funding for taxpayer services and information technology, even if Inflation Reduction Act enforcement funding is reduced.

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