IRS criticized for taking more than 22 months to help ID theft victims get their refunds

Thousands of unfortunate taxpayers who are the victims of identity theft are waiting up to nearly two years to receive their federal income tax refunds, according to news released Wednesday by the National Taxpayer Advocate.

Unfortunately, the situation appears to be getting worse, not better, at the IRS when it comes to clearing up ID theft cases and sending refund cash to those who need it. The rent or mortgage must get paid, groceries need to be bought, the car must get fixed and the charges on high-rate credit cards all keep piling up.

But the tax refund is nowhere to be found for many victims of tax-related ID theft.

Many taxpayers, particularly lower income families who qualify for key tax breaks designed to help workers with low to modest incomes, suffer during an endlessly long wait for their tax refund cash if their personal information ended up being used by crooks and con artists to file a phony tax return.

What the IRS does when it receives 2 returns for 1 taxpayer

The Internal Revenue Service will reject a taxpayer’s return when the federal agency has already received a fraudulent return using the real person’s Social Security number and other personal identification. The IRS needs to take time to analyze who is really owed the money, which is logical.

The IRS freezes the second return so the IRS “can sort out which taxpayer is the legitimate one,” according to the National Taxpayer Advocate’s midyear report to Congress, which was released Wednesday.

Delays hurt legitimate filers

What's mind-boggling is how long it takes to get eligible taxpayers their tax refunds. The system takes way too long for families sitting on the sidelines. They’re not getting their tax refund within 21 days after filing the return, like most people. Instead, they’re waiting more than 22 months. Yes, nearly two years. Step back a bit and put yourself in their shoes.

The IRS had been taking about 19 months to identify the legitimate taxpayers and issue their refunds last year, according to the National Taxpayer Advocate’s 2023 annual report to Congress. As of last September, about 484,000 cases were in the backlog.

In January when the 2023 report was released, National Taxpayer Advocate Erin Collins called the delays “unconscionable” and stressed that the IRS needed to place a higher priority on quickly resolving ID-theft related cases for victims.

Notably, the advocate stated, some 69% of taxpayers whose cases the IRS had resolved had adjusted gross incomes at or below 250% of the federal poverty level. Many of those taxpayers qualify for refundable tax credits, such as the earned income tax credit, and need their refunds to promptly pay their living expenses.

For many of these families, there's not much margin for error in a household budget.

Low-income taxpayers, according to the advocate's annual report, might have qualified for earned income tax credit benefits that approached $7,000 for tax year 2022.

As of April, though, the IRS now was taking more than 22 months to resolve such cases, according to the latest midyear report. As of April, the IRS had about 500,000 such unresolved cases in its inventory.

“Delays of nearly two years make a mockery of the right to quality service in the Taxpayer Bill of Rights,” Collins wrote in her midyear report. “The IRS must prioritize assistance for these victims and fix this problem quickly.”

The advocate's report noted that the IRS delays are lengthy and a "blemish on its performance."

In a statement issued Wednesday afternoon, the IRS said it "recognizes that the backlog of identity theft cases remains one of the most significant ongoing service gaps."

The IRS said it is working to improve its process, including more training and moving additional resources to work such cases. The IRS plans to engage with "stakeholders within and outside the IRS to identify and prevent evolving tax-related identity theft threats."

"Identity theft cases are complex and take time to resolve," according to the IRS statement, "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. Since 2020, the IRS has tripled its closure rate of identity theft cases."

The IRS also noted that the agency continues to remain focused on "preventing tax-related identity theft before it occurs," including an ongoing effort that brings together the IRS, individual states, and the nation’s tax industry to combat fraud. Such preventive actions, according to the IRS, "have strengthened our systems and protected millions of taxpayers from potential identity theft since 2015, but there is still more work to do."

IRS improves phone service but many taxpayers still on hold 20 minutes

The National Taxpayer Advocate examined other challenges in the latest midyear report — and at least one success story — at the IRS.

The federal income tax return season in 2024 ran smoothly for most taxpayers, which Collins dubbed as “excellent news” following the incredible IRS headaches a few years ago.

“After several years of abysmal taxpayer service during the COVID-19 pandemic, the IRS has now delivered two filing seasons that demonstrate that the agency has restored service to pre-pandemic levels and has improved in most, but not all, areas of service," Collins wrote in the midyear report to Congress.

More than 60% of taxpayers claimed refunds, for example, and most received them quickly, the report noted.

As part of the past filing season, though, the report also noted that the IRS suspended more than 20 million returns during processing. At the end of the filing season, the report noted, 5.5 million returns were in "suspense" status for one of several reasons. About half involved "suspected identity theft due to apparent irregularities on the return."

The IRS then sent letters to taxpayers hit by these delays to request that they authenticate their IDs and potentially address concerns. In 2024, the IRS said it saw an uptick in suspicious claims involving the fuel tax credit, the sick and family leave credit, and household employment taxes.

This spring, hundreds of people waited in line in Detroit and elsewhere to take advantage of walk-in hours on a Saturday to try verify IDs and try to fix some of these issues.

One area that isn’t being completely celebrated by the National Taxpayer Advocate is the phone service, where IRS employees still technically only answered about 31% of taxpayer calls in the 2024 tax filing season.

Dramatically more calls are being answered than a few years ago when IRS employees only answered 11% of the calls in fiscal year 2021. After making significant improvements, IRS employees answered 29% of all calls received in fiscal year 2023.

The midyear report praised the IRS for improving its telephone service. But at the same time, the report criticized one often-quoted benchmark — which Collins dubbed a "check-the-box measure" — for being "materially misleading" and failing to reflect the experience of most taxpayers who call.

Reading the report, I'd have to say the convoluted way the IRS and Treasury Department have chosen to measure how well the IRS is handling taxpayer phone calls appears to rival the laborious tax code.

For the 2023 filing season, the Treasury set a goal of achieving an 85% level of service on the IRS’s toll-free telephone lines during the filing season. Staffing went up to cover the telephone lines. The widely cited yardstick indicates that the IRS reached an 88% level of customer service during the filing season this year.

Yet, the 88% level of service leaves many observers with the impression, the advocate stated, that IRS employees answered 88% of taxpayer calls. "In fact, IRS employees answered only 31% of taxpayer calls," the report noted.

The calculation, according to the report, doesn't include calls directed to compliance and dozens of other IRS phone lines that don't fall under the benchmark's umbrella.

The IRS received nearly 40 million calls during the 2024 tax season, according to the midyear report, and only 12.4 million calls were answered by an IRS employee. The wait time on hold averaged eight minutes.

But many taxpayers faced far longer wait times of 21 minutes on average if they called about some specific issues.

More:IRS says taxpayers who filed suspicious returns with key tax credits must verify their IDs

More:Did you pay your 2023 taxes on time? IRS says some people didn't when they actually did

Many phone calls that are routed to different areas at the IRS are not covered by the level-of-service measure, the advocate noted, and tend to face the worst customer service, including calls to set up installment payments, deal with ID theft-related holdups on their tax refunds and address troubling collection notices.

“One would expect a caller facing eviction because an IRS levy is leaving her unable to pay her rent would receive priority over a call requesting an account transcript,” the advocate’s report stated.

But that’s not the case, according to the advocate’s report, because the agency places a lower priority on calls that don’t factor into the calculation for its phone service benchmark.

The measure is causing the IRS to prioritize the wrong work, the advocate’s report stated.

In addition, the report noted, the IRS “should be measuring outcomes at least as much as it measures the ability to get through” on its phone lines.

In a statement Wednesday, the IRS acknowledged that further improvements need to be made with its phone system but questioned the methodology that the taxpayer advocate used for assessing phone service.

In one analysis of accounts management lines, for example, the methodology concluded that IRS employees only answered 32% of calls, the IRS stated. But the IRS noted that the figure includes 10 million calls where the taxpayer immediately hung up 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 IRS stated.

"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," according to the IRS statement.

The IRS also noted that it has worked to apply resources during the filing season to help taxpayers be compliant and meet their filing obligations.

The IRS stated that it strives to deliver service while balancing where it allocates staffing levels, as the agency uses "the same resources to answer telephone calls and respond to taxpayer correspondence."

More:IRS stops processing pandemic-related tax credit that saw non-stop promotions

More:IRS warns that a tax credit everyone's heard about definitely isn't for everyone

IRS to deny 'billions of dollars' in bad business credit claims

Another IRS headache: Many legitimate claims for the employee retention credit face extraordinary delays, as the IRS continues to combat fraud.

The complex refundable credit applied to businesses that continued to pay employees while the company ended up being shut down during the COVID-19 pandemic or had a significant decline in gross receipts from March 13, 2020, through Dec. 31, 2021.

Yet, unscrupulous employer retention credit mills and promoters pounced on unsuspecting small businesses and fueled fraudulent claims. In September, the IRS took the unusual step of temporarily stopping processing claims to get a handle on the fraud.

On June 20, the IRS announced that it plans to deny "tens of thousands of improper high-risk employee retention credit claims" in the weeks ahead. But the agency is resuming processing what it calls "lower-risk claims" for eligible taxpayers.

The IRS said it will deny "billions of dollars" in improper claims, and it will begin more work to issue payments to "taxpayers without any red flags on their claims.”

“This is one of the most complex credits the IRS has administered, and we continue to ask taxpayers for patience as we unravel this complex process,” according to IRS Commissioner Danny Werfel in a statement.

“Ultimately, this period will help us protect taxpayers against improper payouts that flooded the system and get checks to those truly eligible.”

The IRS said its analysis since last September involved studying more than 1 million employee retention credit claims representing more than $86 billion filed amid aggressive marketing by promoters in 2023.

The IRS said it identified between 10% and 20% of claims that fall into the highest-risk group and show clear signs of being erroneous claims.

“People may think they are on safe ground, but many are simply not eligible under the law," Werfel said in the June 20 statement.

Werfel said those with pending claims should "review the guideline checklist on IRS.gov, talk to a legitimate tax professional rather than a promoter and use the special IRS withdrawal program when there’s an issue.”

Collins now plans to work with IRS leadership to try to speed up the processing of eligible claims, including several thousand cases pending in the Taxpayer Advocate Service.

The IRS has a backlog of about 1.4 million employee retention credit claims that have been submitted but not paid. Collins noted, though, that the IRS is “between the proverbial rock and a hard place.”

If the IRS hands out generous payments without adequate review, Collins noted, tens of billions of dollars could go into the wrong hands. But if it declines to pay employee retention credit claims or keeps delaying payments, the legitimate businesses that Congress intended to help will be hurt again.

Contact personal finance columnist Susan Tompor: stompor@freepress.com. Follow her on X (Twitter) @tompor.