National Taxpayer Advocate Erin M. Collins today released her statutorily mandated midyear report to Congress. The report says the tax return filing season generally ran smoothly this year, but it identifies delays in issuing refunds to identity theft victims, misleading telephone measures that lead to poor resource allocation decisions, and delays in processing Employee Retention Credit claims as key taxpayer challenges. The report also emphasizes the importance of technology upgrades as the IRS seeks to modernize its operations in the coming years.
“For most taxpayers, the filing season is the only time they interact with the IRS,” Collins wrote. “After several years of abysmal taxpayer service during the COVID-19 pandemic, the IRS has now delivered two filing seasons that demonstrate the agency has restored service to pre-pandemic levels and has improved in most, but not all, areas of service. This is excellent news for most taxpayers.”
Delays in resolving identity theft cases are burdening victims
When the IRS rejects a taxpayer’s return because an identity thief previously filed a fraudulent return using the taxpayer’s personal identifying information, the IRS freezes the second return so it can sort out which taxpayer is the legitimate one. The National Taxpayer Advocate’s 2023 Annual Report to Congress highlighted that the IRS was taking about 19 months to identify the legitimate taxpayers and issue their refunds. As of September 30, 2023, there were about 484,000 cases in inventory. Notably, 69 percent of taxpayers whose cases the IRS resolved had adjusted gross incomes at or below 250 percent of the Federal Poverty Level. Many of those taxpayers qualify for refundable credits and need their refunds promptly to pay their living expenses.
Since that time, the delays have worsened.
As of April 2024, the IRS was taking more than 22 months to resolve identity theft victim assistance cases, plus several weeks to issue refunds, and it had approximately 500,000 unresolved cases in its inventory.
Collins called the delays “unconscionable” in her prior report, and she reiterated that concern in this report. “Delays of nearly two years make a mockery of the right to quality service in the Taxpayer Bill of Rights,” Collins wrote. “The IRS must prioritize assistance for these victims and fix this problem quickly.”
Misleading telephone measures lead to poor resource allocation decisions
The Treasury Department and the IRS have established the “Accounts Management (AM) Customer Service Representative Level of Service (LOS)” as the agency’s principal and most widely cited measure of taxpayer service. For the past two filing seasons, they set a goal of achieving an LOS of at least 85 percent, and they succeeded. This year, the IRS achieved an LOS of 88 percent.
The report praised the IRS for improved telephone service but criticized its reliance on the LOS measure.
“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.”
Delays in processing Employee Retention Credit (ERC) claims are burdening businesses
The IRS currently has a backlog of about 1.4 million ERC claims that have been submitted but have not been paid. On September 14, 2023, the IRS imposed a moratorium on the processing of new claims and substantially slowed the processing of pending claims due to concern that a high percentage of claims may be non-qualifying.
“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.”
The report said that “many [businesses] have already waited a year or longer for the IRS to determine if their claim is valid.”
The report added: “It’s time for the IRS to… move forward addressing these ERC claims to ensure it protects the taxpayer rights to finality and to challenge the IRS’s position and be heard.” Collins plans to work with the IRS leadership in the coming weeks to try to accelerate the processing of eligible claims, including several thousand cases pending in TAS.
Using Inflation Reduction Act funding to improve the taxpayer experience
The report addresses the IRS’s Strategic Operating Plan priorities to utilize the funding the agency received under the Inflation Reduction Act (IRA). Of the roughly $79 billion in IRA funding the IRS originally received (since reduced to $58 billion), only $3.2 billion was allocated for Taxpayer Services and only $4.8 billion was allocated for Business Systems Modernization (BSM). The IRS has projected it will run out of IRA funding for the Taxpayer Services and BSM accounts in fiscal year (FY) 2026. In the report, Collins reiterates her prior recommendation that Congress reallocate, or authorize the IRS to move, funds from the Enforcement account to the Taxpayer Services and BSM accounts.
“When I look back in eight years on how the IRS spent its Inflation Reduction Act funding,” Collins wrote, “the changes I consider ‘transformational’ will primarily involve the deployment of new technology and innovative thinking.”
The report notes the improvements the IRS has made in taxpayer services and cites numerous examples of critical technology needs, including enhanced online taxpayer accounts, digital scanning of paper-filed tax returns, providing more detailed and up-to-date information on the Where’s My Refund? and Where’s My Amended Return? tools, replacing the agency’s roughly 60 case management systems with an integrated system, and replacing core technology systems that still run on Assembly Language Code and COBOL.
“While opinions about the large boost in Enforcement funding have varied, I have yet to hear a Member of Congress oppose the additional funding provided for Taxpayer Services or IT modernization,” Collins wrote.
“I encourage Members to ensure that taxpayer services and technology modernization – the truly ‘transformational’ component of the IRS’s Strategic Operating Plan – are adequately funded to meet the needs of the taxpaying public and to conduct regular congressional oversight to ensure the funding is well-spent.”
Taxpayer Advocate Service objectives for FY 2025
As required by law, the report identifies TAS’s key objectives for the upcoming fiscal year. The report describes 11 systemic advocacy objectives, five case advocacy and other business objectives, and four research objectives. Among the objectives the report identifies are the following:
Modernize IRS processing to increase efficiency and improve the taxpayer experience. In August 2023, the IRS announced the launch of a Paperless Processing Initiative. The report praises the initiative and points out key areas where progress can be made. Currently, most paper-filed Forms 1040 are still manually transcribed. Some taxpayers who want to e-file their returns can’t do so because they are required to submit forms or schedules that the IRS’s e-file platform still doesn’t support. In addition, the IRS has created a “Document Upload Tool” that allows taxpayers to submit responses to IRS notices through a portal, but once received, the IRS still processes the responses as if they were submitted on paper. TAS plans to monitor implementation of the Paperless Processing Initiative to ensure it meets taxpayer needs, and Collins also recommends the IRS change its policy of rejecting e-filed returns with certain defects because affected taxpayers must then paper-file the returns, which creates additional burden for taxpayers and the IRS alike.
Improve IRS employee hiring, recruitment, retention, and training processes. The report notes that an estimated 37 percent of the IRS workforce is already eligible to retire or will become eligible to retire within the next five years. A high rate of retirements, particularly at the management level, will lead to a “brain drain” that the IRS must be prepared to address. The IRS is also hiring additional employees with its IRA funding, and these new hires must receive proper training to perform their jobs effectively. TAS plans to analyze the IRS’s hiring and recruitment strategies to help the IRS improve its hiring, recruitment, and training processes and make recommendations to improve employee retention strategies to reduce employee turnover.
Enhance IRS transparency by improving applicable technology, sufficiently explaining modernization progress, and providing straightforward guidance on tax law. According to the report, 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 favorably cites IRS technology modernization goals of providing taxpayers with “instant account updates, faster refund processing and payment posting, and near real-time status updates” and giving IRS telephone assistors streamlined access to the taxpayer data they need to respond to taxpayer questions with specificity and detail. Through its membership on cross-functional IRS teams, TAS will continue to advocate for the IRS to provide specific details on its progress toward achieving its goals and produce clear and timely guidance and information for taxpayers, tax professionals, industry, and other stakeholders.
IRS Responses to National Taxpayer Advocate Administrative Recommendations
The National Taxpayer Advocate made 78 administrative recommendations in her 2023 year-end report and then submitted them to the Commissioner for response. The IRS has agreed to implement 62 (or 79 percent) of the recommendations in full or in part.