According to a report released by an independent watchdog, the Internal Revenue Service (IRS), despite making significant improvements to taxpayer services largely thanks to funding from Inflation Reduction Act and a backlog in claims related to tax credits given during the coronavirus pandemic, continues to struggle to resolve a backlog in claims relating to a tax credit program that was offered during this time.
The report highlights the positive steps taken by the agency but also identifies areas where more attention and resources are needed.
The experience of the taxpayer has improved significantly
In her annual report to Congress for 2024, Erin M. Collins, National Taxpayer Advocate wrote: “For the very first time since becoming the National Taxpayer Advocate (NTA) in 2020, I am able to begin this report with some good news. The taxpayer experience has improved noticeably.”
She acknowledged that the IRS has made “major strides” thanks to the billions in multiyear funding. However, she noted that the “IRS service is far from perfect,” indicating there are still many challenges ahead.
The report highlights service gaps despite the positive improvements. These include delays in resolving the claims of nearly half a milllion taxpayers whose identity was stolen by fraudsters, who received a refund for them on their behalf.
According to the report, the time taken to resolve these claims has increased from 19 to 22 months.
The report also highlighted the substantial delays in the resolutions of eligible Employee Retention credit (ERC) requests submitted by employers that rely on these refunds for their survival.
Fraud infects Employee Retention Credit Program
The ERC was designed to help businesses retain their employees during pandemic-era closures. It has become a fraud magnet. Scammers targeted small businesses by exploiting the program’s complex eligibility requirements. They offered to help them apply for the credit in exchange for a fee even if they didn’t qualify.
Collins’ report states that the IRS announced in September 2023 a pause on accepting claims for the credit due to concerns over the influx fraudulent applications. This caused a significant backlog with approximately 1.2 millions claims pending by October 26, 2024.
She noted that “many claims have been pending longer than a year.”
IRS vows to tackle identity theft
IRS Commissioner Daniel Werfel said to Associated Press, “things are moving in a very good direction in terms our performance in providing taxpayer service.” However, he added that “I view identity theft as our biggest current service gap.”
He said that the agency has observed a higher number of theft victims than before the pandemic. This is partly because scammers have increasingly moved to online schemes.
Werfel said that the agency will add more resources to combat the issue. They will streamline identity theft cases, by separating them into simple and complex cases to resolve taxpayer issues faster.
The taxpayer advocate has made several recommendations. Among them, he urges Congress to expand the jurisdiction of the US Tax Court to hear refund cases. He also wants to give the Low Income Taxpayer Clinic more financial flexibility in order to help taxpayers. And he wants to mandate that the IRS processes refund or credit claims in a timely fashion.
The report highlighted that Congress’s multiyear funding, which has now been threatened, enabled many of the IRS improvements, such as faster service and quicker phone response times.
The Inflation Reduction Act originally provided $80 billion to the federal tax collection agency.
A 2023 budget and debt ceiling deal between Republicans and Democrats resulted in $1.4bn being rescinded and a separate agreement taking $20bn from the IRS for the next two year, diverting these funds to other nondefense programmes.
Treasury Department officials have urged Congress to unlock an additional $20 billion in IRS enforcement funds that are currently frozen due specific legislative language.
Werfel said that the increase in the IRS budget has “played an absolutely critical role” for improving taxpayer services. He added, “We have put the money to good work.”
Collins warns Congress against cutting funding for the Inflation Reduction Act, saying that they should not “inadvertently toss out the baby with bathwater”.
This post IRS taxpayer service improves, but identity theft cases persist, says watchdog may be updated as new information becomes available.
