WASHINGTON — The IRS boosted taxpayer services through Democrats’ Inflation Reduction Act but still faces processing claims from a coronavirus pandemic-era tax credit program and is slow to resolve certain identity theft cases, according to an independent watchdog report released Wednesday.
“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,” Erin M. Collins wrote in her 2024 annual report to Congress.
She said “the IRS has made major strides” with the help of the billions of dollars in multiyear funding, though she notes that “IRS service remains far from perfect.”
Remaining service gaps include prolonged delays in resolving claims from the nearly half a million taxpayers whose identities were stolen by fraudsters who received a refund on their behalf. The delays have increased from 19 months in 2023 to 22 months in 2024, according to the report.
In addition, the report says there have been lengthy delays in the resolution of eligible Employee Retention Credit claims submitted by employers who rely on those refunds to stay in business.
The Employee Retention Credit, or ERC, was designed to help businesses retain employees during pandemic-era shutdowns, but it quickly became a magnet for fraud. Its complex eligibility rules allowed scammers to target small businesses, offering help applying for it for a fee — even if they didn’t qualify.
In September 2023, the IRS announced a pause in accepting claims for the tax credit until 2024 because of rising concerns that an influx of applications were fraudulent.
“Although the IRS has processed several hundred thousand claims in recent months, it was still sitting on a backlog of about 1.2 million claims as of October 26, 2024,” Collins said in her Wednesday report. “Many claims have been pending for more than a year.”
IRS Commissioner Daniel Werfel said “things are trending in a very positive direction in terms of our performance in taxpayer service,” but still, “I view the identity theft issue as our largest current service gap.” He said the agency is seeing higher numbers of theft victims overall since before the pandemic, in part because scammers are increasingly moving to online schemes.
Werfel said the agency is adding more resources to the issue and streamlining identity theft cases by distinguishing between complex and simpler cases to resolve taxpayer issues faster.
Among other recommendations, the taxpayer advocate is calling on Congress to expand the U.S. Tax Court’s jurisdiction to hear refund cases, give the Low Income Taxpayer Clinic program more financial leeway to help taxpayers and require the IRS to process claims for refund or credits in a timely manner.
Collins said many IRS improvements, including faster service and quicker phone response times, have been made possible by multiyear funding provided by Congress. However, that funding is at risk of being cut.
The federal tax collection agency originally received an $80 billion infusion of funds under the Inflation Reduction Act, though a 2023 debt ceiling and budget cut deal between Republicans and the Democratic White House resulted in $1.4 billion rescinded from the agency and a separate agreement to take $20 billion from the IRS over the next two years and divert those funds to other nondefense programs.
Now, Treasury Department officials are calling on Congress to unlock another $20 billion in IRS enforcement money that is tied up in legislative language that has effectively rendered the money frozen.
Werfel said the boost in the IRS budget “has played an absolutely critical role” in improvements to taxpayer services. “We’ve put the money to good use,” he said.
If Congress does slash Inflation Reduction Act enforcement funding, Collins recommends that it not make cuts to taxpayer services and information technology. Congress should not, Collins said, “inadvertently throw out the baby with the bathwater.”
