The Internal Revenue Service isn't doing enough to help victims of identity theft receive their tax refunds, according to a report Wednesday from National Taxpayer Advocate Erin Collins, and its statistics on answering phone calls are misleading.
Collins'
However, Collins acknowledged that the tax season went smoothly overall. Over 96% of individual taxpayers filed their returns electronically, and the IRS processed most of them in a timely way and without difficulty. More than 60% of taxpayers claimed refunds, and most received them quickly.
"Many refunds included refundable tax credits like the Earned Income Tax Credit and the Additional Child Tax Credit on which families, particularly low-income families, rely to meet basic living expenses," Collins wrote. "Therefore, timely and predictable refund payments are essential."
She noted that the IRS suspended over 20 million returns during processing, and as of the end of the filing season, 5.5 million returns were in "suspense" status for several reasons. About half of them were held up because of suspected identity theft due to apparent irregularities on the return. In such cases, the IRS sent letters to the affected taxpayers notifying them they needed to authenticate their identities and potentially address the irregularities.
This isn't a new issue, and Collins
Along with identity theft problems, the IRS also noticed an uptick this year in suspicious claims involving the fuel tax credit, the sick and family leave credit, and household employment taxes, with
The IRS responded to the Taxpayer Advocate report and insisted it's working to overcome the backlog. "Although taxpayers continued to see major improvements from the IRS during the 2024 tax season, the IRS recognizes that the backlog of identity theft cases remains one of the most significant ongoing service gaps," an IRS spokesperson said in an email to Accounting Today. "The IRS appreciates the National Taxpayer Advocate calling attention to this critical issue. It's important to note that the IRS is actively working to implement a range of improvements to provide faster service to victims of identity theft, including identifying, training and moving additional resources to work these important cases. Other actions planned are to review our processes and identify new practices that will improve the process. This includes engaging with stakeholders within and outside the IRS to identify and prevent evolving tax-related identity theft threats."
The IRS is leveraging the funding from the Inflation Reduction Act to deal with the backlog.
"Identity theft cases are complex and take time to resolve, but with increased funding made available by the Inflation Reduction Act, the IRS is now in a better position to resolve cases in a timelier manner," the IRS statement continued. "Since 2020, the IRS has tripled its closure rate of identity theft cases. In addition, the IRS remains focused on preventing tax-related identity theft before it occurs. The Security Summit partnership between the IRS, states and the nation's tax industry, for example, have strengthened our systems and protected millions of taxpayers from potential identity theft since 2015, but there is still more work to do."
Level of service
The report also criticized the IRS for using a misleading measurement to report on its progress in answering the phones to respond to taxpayer questions.
The IRS and the Treasury Department established the "Accounts Management (AM) Customer Service Representative Level of Service (LOS)" as the agency's main measure of taxpayer service and set a goal over the past two years of achieving an LOS of at least 85%, a goal in which they succeeded. This year, the IRS achieved an LOS of 88%. However, Collins pointed out that figure leaves many people with the mistaken impression that IRS employees answered 88% of taxpayer calls, when in fact, IRS employees answered only 31% of taxpayer calls.
"In my opinion, the AM LOS measure has taken on outsized importance in recent years, as the IRS has allocated resources to hit ambitious but arbitrary goals that mean less than meets the eye and that consequently have required the IRS to neglect calls to non-AM telephone lines and workstreams like paper correspondence that I believe should receive higher priority," Collins wrote. "The measure is causing the IRS to prioritize the wrong work, and it needs to be replaced."
The IRS contended that its level of phone service has improved. "We appreciate the National Taxpayer Advocate recognizing the IRS made improvements during the past two filing seasons," an IRS spokesperson said in an email to Accounting Today. "While we do not concur with all of the methodology the Advocate uses on assessing phone service, there is clear consensus our phone service to taxpayers improved during the past two tax seasons with funding from the Inflation Reduction Act."
However, the agency admitted it needs to improve the level of service on phone calls.
"The IRS recognizes it needs to make further improvements, and the agency will continue working on its levels of service across all its phone lines as part of the larger transformation efforts underway," said the IRS.. "Providing taxpayers with a diverse set of service options is integral to the IRS strategic plan. Each year, the IRS evaluates how to meet the needs of taxpayers in the most effective and efficient way, and we made significant improvements to service on our phone lines this filing season. Taxpayers have benefited from the IRS's rollout of technology like customer call backs, voice and chat bots, and other new and improved digital self-service tools."
The IRS measures customer service representative level of service based on the percentage of taxpayers who call for assistance from a live assistor and actually reach a live assistor, the agency noted, and many of its employees need to play multiple roles in answering the phones as well as responding to written correspondence.
"We strive to deliver the highest CSR LOS possible within resource and demand constraints, but because we use the same resources to answer telephone calls and respond to taxpayer correspondence, telephone agent resources are balanced between meeting the telephone demand and maintaining healthy correspondence inventories," said the IRS. "The Advocate's methodology for examining the CSR LOS concludes IRS employees only answered 32% of calls, but that figure includes 10 million calls where the taxpayer immediately hung up immediately after calling or before selecting a service. The remaining 18 million calls were answered either by a phone assistor in Accounts Management or through automation. The Advocate also questions the prioritization of the Accounts Management Level of Service, but as the Advocate's report shows, Accounts Management answers the majority of calls. Applying resources during the filing season to help taxpayers be compliant with their filing responsibilities is consistent with the agency's strategic priority to ensure taxpayers can meet their filing obligations."
ERC claims backlog
The report also calls out the IRS for its slow processing of claims for the fraud-plagued employee retention credit. Last September, the IRS imposed a moratorium and
Collins noted that's hurting businesses that have submitted legitimate claims for the credit. The IRS currently has a backlog of about 1.4 million ERC claims that have been submitted but not paid.
"The IRS is between the proverbial rock and a hard place when it comes to ERC claims," Collins said in releasing the report. "If it pays out ERC claims without adequate review, improper payments may be in the tens of billions of dollars. If it declines to pay ERC claims or delays payments further, the very businesses for which Congress created the ERC will be harmed again."
Her report pointed out that many businesses have already waited over a year for the IRS to determine if their claim is valid. Collins thinks it's time for the IRS to move forward in addressing the claims and give taxpayers a chance to challenge the IRS's determination on their validity. She plans to work with the IRS leadership in the weeks ahead to try to accelerate the processing of eligible claims, including several thousand cases still pending at the Taxpayer Advocate Service, which she leads and where taxpayers go for help when they have trouble with the IRS.
Inflation Reduction Act funding
The report also discusses the IRS's use of the extra funding provided by the Inflation Reduction Act. The 2022 law originally was supposed to give the IRS around $79 billion in funding over 10 years to improve taxpayer service, technology and enforcement. However, that amount has since been reduced to about $58 billion after cutbacks by Congress. Only $3.2 billion was allocated for taxpayer service and only $4.8 billion was allocated for business systems modernization, the report noted. The IRS has projected it will run out of IRA funding for taxpayer services and technology modernization accounts in fiscal year 2026. Collins urged the Congress to reallocate, or authorize, the IRS to move funds from the enforcement account to the taxpayer services and BSM accounts.
"When I look back eight years from now on how the IRS spent its Inflation Reduction Act funding, the changes I consider 'transformational' will primarily involve the deployment of new technology and innovative thinking," Collins wrote.
She acknowledged the IRS has made strides on the technology front, including enhanced online taxpayer accounts, digital scanning of paper-filed tax returns, more detailed and up-to-date information on the "Where's My Refund?" and "Where's My Amended Return?" tools, replacement of the agency's roughly 60 case management systems that don't communicate with each other with an integrated system, and replacement of core technology systems that still run on old assembly language and COBOL programming code.
Collins praised the IRS's progress on its Paperless Processing Initiative but recommended the IRS change its policy of rejecting electronically filed returns with certain defects, because affected taxpayers then need to paper-file their returns, which creates extra burdens for both taxpayers and the IRS itself.
Collins also recommended the IRS improve its transparency by sufficiently explaining its modernization progress and providing straightforward guidance on tax laws. The report said the IRS should do a better job of "providing taxpayers, tax professionals, industry and other stakeholders with all the information to which they're entitled, when they need it, in an accessible, clear and sufficiently detailed way."
The report also recommended the IRS improve its hiring, recruitment, retention and training processes for new employees. An estimated 37% of the IRS workforce is already eligible to retire or will become eligible to retire within the next five years, it noted. A high rate of retirements, especially at the management level, will lead to a "brain drain" that the IRS must be prepared to address. The IRS is hiring more employees with its IRA funding, but the new hires need to receive proper training to perform their jobs effectively. The Taxpayer Advocate Service plans to analyze the IRS's hiring and recruitment strategies to help the IRS improve its processes and make recommendations to improve employee retention and reduce turnover.
