Rampant identity theft is overwhelming the Internal Revenue Service, leaving it with a backlog of half a million unsolved fraud cases and leaving taxpayers without refunds and credits they should be receiving, the agency's watchdog said in a report to Congress on Wednesday.
The report from the national taxpayer advocate group described the delays in dealing with identity theft cases as a “blemish” on the IRS's performance in the midst of a major modernization campaign aimed at improving taxpayer service. The IRS was criticized by watchdogs last year for delays in identity theft cases, but the backlog has only gotten worse.
The IRS has spent nearly two years resolving identity theft victim assistance cases, with caseloads rising to about 500,000 from 484,000 in September.
“It is unjust for the IRS to delay resolving identity theft victim assistance cases,” Erin Collins of the taxpayer advocacy group wrote in the report.
She called on the IRS to prioritize helping victims, adding that “the nearly two-year delay makes a mockery of the taxpayer's right to quality service as enshrined in the Bill of Rights.” The backlog is likely to give Republican lawmakers more ammunition to criticize the IRS and to push for further cuts to the $80 billion in funding it received through the Inflation Control Act of 2022. Critics of the IRS have argued that the agency is bloated and not putting its funds to good use.
Identity theft has been a long-standing problem for the IRS. Criminals often steal taxpayer identities and submit fraudulent forms to claim refunds. Taxpayers only realize this when they try to claim their refund, and are forced to go through the tedious process of filing identity theft affidavits and paper tax returns before the IRS can open a case to investigate the incident.
At that point, victims of identity theft can find themselves waiting months to receive the money they are owed.
National taxpayer advocates say most victims of identity theft are on the lower end of the income spectrum and often need refunds or refundable tax credits to cover living expenses.
“The IRS is re-victimizing taxpayers by making them wait nearly two years to resolve their issues and receive their refunds,” the report said.
The report said the problem was due in part to a re-allocation of IRS resources aimed at improving metrics showing how efficiently calls are answered, but the watchdog said the agency was using outdated methods to track how quickly calls were answered, with most callers being disconnected or transferred to an automated operator.
Despite the criticism, the watchdog noted that the IRS has devoted more staff to combating identity fraud cases and that the 2024 tax filing season overall went “smoothly.”
The IRS was initially allocated $80 billion to improve its technology and enforcement capabilities, but Congress clawed back about $20 billion of that funding last year amid a spending fight between Republicans and Democrats.
According to a report released last week by the Treasury Department's Inspector General for Tax Administration, the IRS has so far spent $5.7 billion, or 10 percent of the Inflation Control Act's funding, but about $2 billion of that has gone to regular operating expenses that the IRS doesn't have sufficient resources to cover.