The IRS must increase resources for victim-assistance cases involving identity theft, which are taking an average of almost two years to resolve, an independent watchdog reported on Wednesday.
Such a delay is "unconscionable" given that nearly half a million taxpayers reported cases in 2024, the agency's national taxpayer advocate, Erin M. Collins, wrote in the office's annual report.
Rather than prioritizing identity-theft cases, the IRS has diverted resources from the unit handling them, forcing victims to wait "endlessly for resolution and refunds," according to the report. The average processing time for identity-theft victim assistance claims actually increased by 120 days between the 2023 and 2024 fiscal years even though the agency appears to have closed more cases in 2024 and made small steps to improve efficiency.
Among the report's recommendations was to keep workers in the IRS Identity Theft Victim Assistance unit on their cases during peak tax season rather than reassigning them to answering phone calls or handling other tasks, Collins wrote. She also urged the IRS to reduce its average identity-theft case resolution time to less than 90 days.
DODGY TAX CREDIT
Other problems that Collins highlighted were persistent issues with the Employee Retention Credit, a program that was supposed to help businesses survive the coronavirus pandemic but became mired in fraud allegations. Unwanted and fraudulent claims have clogged the IRS's processing system and extended the wait for small businesses with legitimate claims, leading to a backlog of about 1.2 million claims as of Oct. 26 - many of which have been pending for more than a year, Collins said.
The IRS placed a moratorium on processing new claims in September 2023, and in mid-2024 began processing claims submitted between that month and Jan. 31, 2024. The goal, IRS Commissioner Danny Werfel said in mid-December, is to process roughly 500,000 more claims in 2025. But Collins's report says the agency has been slow in its progress.
Collins also pointed to a "lack of information and transparency" around claim denials that has plagued the IRS. It's not possible for business owners to check the status of their claim, and notices disallowing claims are often "unclear and confusing," she noted, leaving taxpayers unsure of how to respond to or dispute the issues raised by the IRS. The IRS's average processing time for such claims is now more than a year, Collins said.
"While waiting for the IRS to process these claims, businesses have been forced to close, experienced significant financial hardship, or taken out loans that continue to accrue interest," Collins wrote.
Collins implored the IRS to speed up claim processing and improve employee training in that unit. The IRS should also provide clearer explanations for denied claims, including how taxpayers can appeal the decision or provide additional information, she wrote.
There were also a few bright spots in Collins's report. The IRS dramatically improved its telephone service and taxpayer correspondence in 2024, which could make it easier for taxpayers to get answers to their questions during the 2025 filing season.
IRS workers answered twice as many taxpayer calls in 2024 compared with 2022, and wait times were cut in half. The agency also improved accessibility for its in-person services, Collins said.
Funding for the IRS to update its technology and hire more workers had been crippled across the last decade, which Collins had blasted in previous reports. But recent funding improvements to the IRS's taxpayer services and IT divisions helped slash the number of customer service nightmares in 2024, she said.
Collins credited the IRS's 2023 hiring spree, where it added 2,000 customer service representatives, for the response-time improvement. Still, taxpayers who had something wrong with their returns after tax season encountered difficulty reaching the IRS. The agency's customer service representatives answered 10 percent fewer calls outside of tax season, while wait time tripled from 3.4 minutes to 12.6 minutes.
As a Republican-controlled Congress is looking to slash funding for Inflation Reduction Act initiatives this year, Collins highlighted the impact of the cash infusion the agency got under the 2022 legislation. Collins cautioned lawmakers to avoid cutting funding for the agency's taxpayer services and technology modernization, which account for a combined 10 percent of its total budget.
Slashing financial support for these programs, which have helped improve the IRS's ability to process returns and customer service claims, would "inadvertently throw the baby out with the bathwater" Collins said.