IRS Faces 500,000 Unresolved Identity Theft Cases, Watchdog Reports

The Internal Revenue Service (IRS) is grappling with a significant challenge: a backlog of approximately 500,000 unresolved identity theft cases. This growing issue has had severe repercussions over the past year, particularly impacting low-income taxpayers who depend on their federal tax refunds.

A recent report by the National Taxpayer Advocate sheds light on the severity of the situation and suggests potential steps to address and improve it.

The Growing Importance of Addressing the Backlog

The backlog of identity theft cases is a critical issue affecting thousands of taxpayers, particularly those with low incomes. These individuals often rely heavily on their tax refunds to meet essential expenses, and delays in processing identity theft cases leave them without much-needed funds.

The National Taxpayer Advocate, Erin Collins, has been vocal about this issue, emphasizing the necessity of addressing it promptly to alleviate the financial strain on affected taxpayers.

Erin Collins’ Perspective on IRS Challenges

Erin Collins has observed a notable shift within the IRS, transitioning from a crisis mode to a more hopeful outlook. Despite acknowledging the progress made, she points out that significant hurdles remain, particularly in modernizing the IRS’s technology systems and business processes.

Collins remains hopeful that these changes will eventually lead to better outcomes for taxpayers, improving the efficiency and effectiveness of the IRS.

Technological and Process Modernization

One of the primary challenges highlighted by Collins is the need for the IRS to modernize its technology and streamline its business processes. Outdated systems and inefficient procedures have contributed significantly to the backlog and the overall slow pace of resolving identity theft cases.

By investing in modern technology and adopting more efficient processes, the IRS can improve its capacity to handle these cases more effectively.

How Identity Theft Impacts Tax Filings

Identity theft in tax filings occurs when someone uses a taxpayer’s personal information to file a fraudulent tax return. In such cases, the IRS must freeze the return to determine the legitimate filing.

This verification process can be lengthy, currently taking over 22 months, leaving the victim unable to collect their return in the interim. This delay exacerbates financial difficulties for those who rely on their tax refunds for essential expenses.

The Strain on Low-Income Taxpayers

In 2023, a significant percentage of taxpayers affected by identity theft had incomes at or below 250% of the federal poverty level. This demographic is particularly vulnerable as they often rely on their tax refunds to cover critical expenses.

The prolonged delays in resolving these cases add financial strain to already struggling households, highlighting the urgent need for the IRS to expedite the resolution process.

IRS Call Handling Issues

During the 2024 filing season, IRS employees only answered 31% of the calls they received. This low response rate can be attributed to several factors, including automated responses, calls being routed to different lines, and taxpayers hanging up before being placed in a queue.

Despite these challenges, IRS employees spent a staggering 1.1 million hours, or 29% of their time, just waiting to receive calls. This inefficiency underscores the need for better resource allocation and process improvements within the IRS.

Funding and Optimism for the Future

The IRS has received a substantial funding boost through the Inflation Reduction Act, which allocated $58 billion to the agency. This funding includes $3.2 billion specifically for taxpayer services and $4.8 billion for system modernization.

Collins is optimistic that these funds will help the IRS address its current issues. However, she also suggests that Congress should either provide additional funding or allow the IRS to reallocate existing funds to areas where they are most needed.

Allocating Resources Effectively

Collins recommends that the IRS allocate resources more effectively to tackle the identity theft backlog. By improving resource allocation, the IRS can process filings within normal timeframes, significantly reducing the wait time for taxpayers to receive their refunds.

Effective resource management is crucial for addressing the backlog and enhancing the overall efficiency of the IRS.


Recommendations for Improvement

To address the identity theft backlog, several key recommendations have been proposed:

  1. Enhancing Technology and Processes: Modernizing the IRS’s technology and streamlining its processes will improve efficiency in handling identity theft cases.
  2. Better Resource Allocation: Allocating resources more effectively can help the IRS process filings within normal timeframes, reducing delays for taxpayers.
  3. Increased Funding: Additional funding or the ability to reallocate existing funds can support the IRS in addressing its current challenges more effectively.

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