For IRS, backlogs and identity theft problems remain

The IRS is still too slow in processing amended tax returns, answering taxpayer phone calls and resolving identity theft cases, according to an independent watchdog within the agency.

While there is “cautious optimism” for an agency that has excavated itself from tens of millions of backlogged tax returns with new federal funding, the report states “the IRS has a tall mountain to climb to achieve its goals of rebuilding the agency, modernizing its systems, and providing the quality service taxpayers deserve.”

The federal tax collector needs to improve its processing and taxpayer correspondence issues despite a massive boost in funding provided by the Democrats' Inflation Reduction Act, according to an annual report Wednesday to Congress from Erin M. Collins, who leads the organization assigned to protect taxpayers' rights under the Taxpayer Bill of Rights.

“The taxpayer experience vastly improved during the 2023 filing season,” the report says. “Despite the improvement, some problems carried over and others are inevitable in a tax system as large as ours. Several stand out.”

The report serves as a reality check of sorts as IRS leaders say the funding boost is producing big improvements in services to taxpayers. GOP critics, meanwhile, are trying try to claw back some of the money and painting the agency as an over-zealous enforcer of the tax code.

The IRS is experiencing “extraordinary delays” in assisting identity theft victims, taking nearly 19 months to resolve self-reported cases, which the report calls “unconscionable” since a delay in receiving a refund can worsen financial hardships.

Additionally, the backlog of unprocessed amended returns has quadrupled from 500,000 in 2019 to 1.9 million in October last year. And taxpayer correspondence cases have more than doubled over the same period, from 1.9 million to 4.3 million, according to the report.

The report also says IRS employees answered only 35% of all calls received, despite the agency claiming 85%. The IRS doesn't include calls where the taxpayer hangs up before being placed into a calling queue.

IRS Commissioner Daniel Werfel told The Associated Press that the Taxpayer Advocate report “rightfully points out that we have a lot of work to do, but it also rightfully points out that this is not an overnight journey.”

The report says the difference between the 2022 filing season and the 2023 filing season “was like night and day.”

The IRS has been pulling itself out of decades of underfunding — by the end of the 2021 filing season, it faced a backlog of over 35 million tax returns that required manual data entry or employee review.

And while the agency has been on a hiring spree — thousands of workers since 2022 — the new employees are in need of proper training, the report says. The 2023 Federal Employee Viewpoint Survey shows that a quarter of IRS employees don't think they receive adequate training to perform their jobs well.

“It is critical that the IRS make comprehensive training a priority and ensure that new hires receive adequate training before they are assigned to tasks with taxpayer impact,” Collins said.

Last April, Werfel released details of IRS plans to use its IRA money for improved operations, pledging to invest in new technology, hire more customer service representatives and expand the agency's ability to audit highwealth taxpayers.

The federal tax collection agency originally received an $80 billion infusion of funds under the Inflation Reduction Act but that money is vulnerable to potential cutbacks.

Last year's debt ceiling and budget cuts deal between Republicans and the White House resulted in $1.4 billion rescinded from the agency and a separate agreement to take $20 billion from the IRS over the next two years and divert those funds to other nondefense programs.

Collins said in the report that she believes some of the law's funding that was provided for enforcement should be redirected to improving taxpayer services “to enable the IRS to make the changes necessary to transform the taxpayer experience and modernize its IT systems in the next few years.”

Werfel said the IRS doesn't have “extensive flexibility” to move funds around in such a manner.

“I encourage the IRS to put more emphasis on reducing its paper processing backlog in 2024,” Collins said in her report.

The report comes shortly after the IRS announced that the 2024 filing season begins on Jan. 29. Agency leaders say better customer service and tech options will be available to taxpayers and most refunds should be issued in less than 21 days.