In her latest annual report to Congress, National Taxpayer Advocate Erin Collins praised the IRS for a much-improved taxpayer experience but also highlighted ongoing challenges at the tax agency, particularly hold-ups in processing employee retention credit (ERC) claims and resolving identity theft victim assistance cases.
“For the first time since I became the National Taxpayer Advocate in 2020, I can begin this report with good news: The taxpayer experience has noticeably improved,” Collins noted in her 2024 report, which was released on Jan. 8. “In 2024, taxpayers and practitioners experienced better service, generally received timely refunds, and faced shorter wait times to reach customer service representatives. … After receiving multiyear funding, the IRS has [also] made major strides toward improving its taxpayer services and information technology (IT) systems.”
But that funding the IRS received through President Joe Biden’s signature bill, the Inflation Reduction Act, in 2022 has been targeted by Republicans. The agency was allotted roughly $79 billion spread out over 10 years from the legislation to modernize its business systems, improve taxpayer services, hire new employees, and to bolster tax enforcement.
However, that funding has been slashed to about $57.8 billion as a result of deals between the Biden administration and Republican lawmakers in 2023. In addition, officials from the Treasury Department in November called on Congress to unlock $20 billion in IRS enforcement money that is currently tied up in legislative language that has effectively rendered the money frozen.
The $20 billion in question is separate from the $20 billion rescinded from the IRS in 2023. However, the legislative mechanism keeping the government afloat inadvertently duplicated the one-time cut, according to the Associated Press.
“The headline from the Inflation Reduction Act was that the IRS received about $79 billion in additional funding over a 10-year period. Much of that funding has generated controversy—namely, the funding allocated for enforcement. But some of the funding has received strong bipartisan support—namely, the funding allocated for taxpayer services and technology modernization,” Collins wrote. “I want to highlight this distinction so that if Congress decides to cut IRA funding, it does not inadvertently throw the baby out with the bathwater.”
Continuing delays in processing ERC claims
As of Oct. 26, 2024, the IRS faced a backlog of about 1.2 million ERC claims, with many claims pending for more than a year. While the IRS has valid concerns about paying ineligible claims, the slow processing time is harming many eligible businesses that are relying on these funds to pay expenses, the report states.
Additional concerns include:
- Lack of transparency for businesses trying to track the status of their claims;
- Confusing disallowance letters that have omitted critical information;
- The use of audit-like procedures for disallowed claims without standard taxpayer audit protections; and
- Significant delays for businesses whose refund checks were stolen and have waited months or longer to receive replacement checks.
The ERC is a refundable tax credit that was enacted during the height of the COVID-19 pandemic to encourage businesses to keep their employees on payroll. However, the program became inundated with fraud—much of which the IRS blames on aggressive marketing tactics and misleading claims by so-called ERC mills, which encouraged ineligible businesses to apply for the credit. The IRS implemented a moratorium on processing claims in September 2023 and has been slow to process claims ever since.
“The National Taxpayer Advocate acknowledges there may be some claims that do not qualify, and some may be fraudulent. For that reason, it is understandable why the IRS would believe it was appropriate to temporarily press the pause button on claims processing and take time to develop better methods to identify non-qualifying claims,” the report says. “But the IRS cannot make taxpayers wait indefinitely to receive their credits. It should accelerate the processing of ERC claims, and it should be transparent and provide details on its plans.
“Many businesses with legitimate ERC claims are depending on the funds to aid in their recovery from the pandemic,” the report continues. “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.”
After the National Taxpayer Advocate’s report went to press, IRS Commissioner Danny Werfel announced in mid-December he anticipates that approximately 500,000 additional claims will be processed in 2025, but the details and timing of the refunds are still to be determined.
Ongoing delays in resolving identity theft cases
For cases closed by the IRS’s Identity Theft Victim Assistance (IDTVA) unit in fiscal year 2024, the average time it took the IRS to resolve identity theft cases and issue refunds to the affected victims was almost two years. These delays impacted nearly half a million taxpayers and were even worse than the delays seen in FY 2023, when cases took almost 19 months to resolve.
Collins once again called these delays “unconscionable” and recommends the IRS prioritize identity theft case resolution by keeping all IDTVA employees focused on these cases rather than reassigning them to other tasks during the filing season. In addition, she urged the agency to reduce case resolution times to 90 days or less.
“Tax-related identity theft has been more prevalent, but the IRS’s outdated practices and prioritization of other service areas are contributing factors to the unprecedented delays victims experience,” the report states. “Until the IRS prioritizes providing timely resolution in identity theft cases, it will continue to burden victims with significant delays that have real financial consequences.”
Adequate funding for taxpayer services and technology upgrades is critical
In her preface to the report, Collins emphasizes the need for adequate funding to support critical taxpayer services and technology upgrades.
The following table shows the original Inflation Reduction Act funding total broken out among the IRS’s four budget accounts, highlighting that only 4% of the funding was allocated for taxpayer services and only 6% was allocated for business systems modernization (BSM).
Inflation Reduction Act IRS funding allocations
| IRS budget account | Amount allocated | Percentage of total |
|---|---|---|
| Enforcement | $45.6 billion | 58% |
| Operations support | $25.3 billion | 32% |
| Business systems modernization | $4.8 billion | 6% |
| Taxpayer Services | $3.2 billion | 4% |
| Total | $78.9 billion | 100% |
“I have previously criticized this extreme imbalance in funding priorities, and to improve the taxpayer experience, I have recommended that Congress either provide additional funding for the taxpayer services and BSM accounts or reallocate a portion of the enforcement funding to those accounts. I reiterate that recommendation as the new Congress convenes,” Collins writes.
The report highlights numerous examples of improvements the IRS has made using its multiyear funding. Taxpayer services funding has enabled the IRS to hire more customer service representatives, allowing the agency to answer nearly 9 million more telephone calls than two years earlier and to cut in half the average time needed to process individual taxpayer correspondence from about seven months to about three and a half months. The IRS has also expanded in-person help at its taxpayer assistance centers, adding evening and weekend service in many locations to accommodate taxpayers who are unable to visit during normal business hours.
BSM funding has supported critical automation improvements, allowing taxpayers to resolve issues without the involvement of an IRS employee, the report says. With these improvements, taxpayers can now obtain more information and transact more business with the IRS through their online accounts, use voicebots and chatbots to get answers to many of their questions, submit correspondence to the IRS electronically, and communicate with the IRS through secure messaging in pending cases. Furthermore, the IRS now allows taxpayers to submit 30 of the most common taxpayer forms from mobile devices, which Collins says is a game-changer for the estimated 15% of Americans who rely solely on their smartphones for internet access.
“With sufficient funding for taxpayer services and BSM, I believe the IRS can exponentially build on the improvements of the last two years and produce a tax system that respects taxpayer rights, is world-class, and makes compliance easier, which will likely improve revenue collection as well,” Collins wrote.
Other serious taxpayer problems
In addition to ERC and IDTVA processing delays, the report identifies several other serious taxpayer problems, including:
Continuing delays in IRS return processing are frustrating taxpayers and causing refund delays: The IRS receives more than 10 million paper-filed Forms 1040 each year and more than 75 million paper-filed returns and forms overall. Until recently, IRS employees had to manually transcribe the data from those returns into IRS systems. While the IRS has made strides toward automating return processing by scanning more than half of paper-filed returns and forms, it still has a long way to go to digitize all paper.
Additionally, e-filed returns are sometimes rejected—nearly 18 million (about 12%) of e-filed Forms 1040 were rejected in the past year. The IRS generally rejects returns flagged by its fraud detection filters, but most rejected returns are valid, requiring taxpayers to jump through additional hoops to resubmit their returns electronically or submit their returns on paper.
The report highlights the strain this puts on taxpayers, particularly low-income taxpayers eligible for refundable Earned Income Tax Credit (EITC) benefits. The Taxpayer Advocate Service (TAS) recommends the IRS continue its efforts to automate tax processing, including digitizing nearly all paper-filed returns by the 2026 filing season and enabling electronic processing of amended tax returns.
Taxpayer service is often not timely or adequate: While taxpayer service improved across the IRS’s three main channels—telephone, in-person, and online—significant service gaps remain, the report says. The IRS achieved an 88% “level of service” (LOS) on its accounts management lines during the last filing season, but this measure excludes calls directed to telephone lines that fall outside the “accounts management” umbrella (30% of all calls in FY 2024), calls where a taxpayer hangs up before being placed in a calling queue, and calls made outside the filing season.
Overall, the LOS for all toll-free lines in FY 2024 was just 56%, with only 31% of callers reaching an IRS assistor. Of the 6.2 million calls the IRS received from taxpayers whose returns had been stopped by the agency’s identify theft filters and who were calling to authenticate their identities, the IRS answered only about 20%. This has left millions of taxpayers without the support they need.
TAS recommends the IRS adopt more accurate service metrics and prioritize answering non-accounts management telephone lines that serve largely vulnerable taxpayer populations. Among these are the installment agreement/balance due, taxpayer protection program, and automated collection system telephone lines.
Continuing challenges in employee recruitment, hiring, training, and retention are hindering the IRS’s ability to achieve transformational change in taxpayer service and tax administration: The IRS faces ongoing difficulties in hiring, training, and maintaining employees, and job postings aren’t consistently targeted to reach the desired candidates. The agency often takes several months to hire new employees, leading some candidates to accept other offers. New hires require extensive training before they become productive employees, and experienced employees often must be reassigned to train them. Additionally, a Congressional Budget Office study published in 2024 found that federal employees with professional degrees earn almost 29% less than their non-federal counterparts, making it harder for the IRS to compete in the tight job market.
TAS recommends the IRS explore alternative recruitment platforms, review pay disparities, and implement strategies to improve employee retention.
Legislative recommendations
The National Taxpayer Advocate’s 2025 Purple Book proposes 69 legislative recommendations intended to strengthen taxpayer rights and improve tax administration. Among the recommendations:
1. Authorize the IRS to establish minimum competency standards for federal tax return preparers and revoke the PTINs of sanctioned preparers: The IRS receives more than 160 million individual income tax returns each year, and most are prepared by paid tax return preparers. While some tax return preparers must meet licensing requirements, such as CPAs, attorneys, and enrolled agents, most tax return preparers aren’t credentialed. Numerous studies have found that non-credentialed preparers prepare inaccurate returns disproportionately, causing some taxpayers to overpay their taxes and other taxpayers to underpay their taxes, which subjects them to penalties and interest charges. Non-credentialed preparers also drive much of the high improper payments rate attributable to wrongful EITC claims. In FY 2023, 33.5% of EITC payments, amounting to $21.9 billion, were estimated to be improper, and among tax returns claiming the EITC prepared by paid tax return preparers, 96% of the total dollar amount of EITC audit adjustments was attributable to returns prepared by non-credentialed preparers.
Federal and state laws generally require lawyers, doctors, securities dealers, financial planners, actuaries, appraisers, contractors, motor vehicle operators, and barbers and beauticians to obtain licenses or certifications and, in most cases, to pass competency tests. The Obama, first Trump, and Biden administrations have each recommended that Congress authorize the Treasury Department to establish minimum competency standards for federal tax return preparers.
To protect taxpayers and the public, TAS also recommends that Congress provide this authorization, as well as authorization for Treasury to revoke the Preparer Tax Identification Numbers (PTINs) of preparers who have been sanctioned for improper conduct.
2. Expand the U.S. Tax Court’s jurisdiction to hear refund cases: Under current law, taxpayers seeking to challenge an IRS tax-due adjustment can file a petition in the U.S. Tax Court, while taxpayers who have paid their tax and are seeking a refund must file suit in a U.S. district court or the U.S. Court of Federal Claims. Litigating a case in a U.S. district court or the Court of Federal Claims is generally more challenging—filing fees are relatively high, rules of civil procedure are complex, the judges generally don’t have tax expertise, and proceeding without a lawyer is difficult.
By contrast, taxpayers litigating their cases in the Tax Court face a low $60 filing fee, may follow less formal procedural rules, are generally assured their positions will be fairly considered because of the tax expertise of the Tax Court’s judges, even if they don’t present their arguments effectively, and can more easily represent themselves. For these reasons, the requirement that refund claims be litigated in a U.S. district court or the Court of Federal Claims effectively deprives many taxpayers of the right to judicial review of an IRS refund disallowance. In FY 2024, about 97% of all tax-related litigation was adjudicated in the Tax Court.
TAS recommends Congress expand the jurisdiction of the Tax Court to give taxpayers the option to litigate all tax disputes, including refund claims, in that forum.
3. Enable the Low-Income Taxpayer Clinic (LITC) program to assist more taxpayers in controversies with the IRS: The LITC program assists low-income taxpayers and taxpayers who speak English as a second language. When the LITC program was established as part of the IRS Restructuring and Reform Act of 1998, the law limited annual grants to no more than $100,000 per clinic. The law also imposed a 100% “match” requirement, so a clinic can’t receive more in grant funds than it raises from other sources. The nature and scope of the LITC program have evolved considerably since 1998, and those requirements are preventing the program from expanding assistance to a larger universe of eligible taxpayers.
TAS recommends Congress remove the per-clinic cap and allow the IRS to reduce the match requirement to 25%, where doing so would expand coverage to additional taxpayers.
4. Require the IRS to timely process claims for refund or credit: Millions of taxpayers file refund claims with the IRS each year. Under current law, there is no requirement that the IRS pay or deny them. It may simply ignore them. The taxpayers’ remedy is to file suit in a U.S. district court or the U.S. Court of Federal Claims. For many taxpayers, that is not a realistic or affordable option. The report says the absence of a processing requirement is a “poster child” for non-responsive government. While the IRS generally does process refund claims, the claims can and sometimes do spend months and even years in administrative limbo within the IRS.
TAS recommends Congress require the IRS to act on claims for credit or refund within one year and impose certain consequences on the IRS for failing to do so.
5. Allow the limitation on theft loss deductions in the Tax Cuts and Jobs Act (TCJA) to expire so scam victims are not taxed on amounts stolen from them: Many financial scams involve the theft of retirement assets. In a typical scam, a con artist may pose as a law enforcement officer, convince a victim that her retirement savings are at risk, and persuade the victim to transfer her retirement savings to an account that the scammer controls. Then, the scammer absconds with the funds.
Under the tax code, the victim’s withdrawal of funds from a retirement account is treated as a distribution subject to income tax and, if the victim is under age 59½, to a 10% additional tax as well. Thus, the victim may not only lose her life savings but also owe significant tax on the stolen funds. Prior to 2018, scam victims generally could claim a theft loss deduction to offset the stolen amounts included in gross income, but the TCJA eliminated the deduction.
TAS recommends Congress allow this TCJA limitation to expire so the theft deduction is again available in these circumstances.
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Tags: Income Tax, IRS, Legislation, Taxes
