Rampant Identity Theft Is Taxing the I.R.S.

Rampant identity theft has overwhelmed the Internal Revenue Service, resulting in a backlog of 500,000 unresolved fraud cases, leaving taxpayers without refunds and credits that they are due, the agency’s watchdog wrote in a report to Congress on Wednesday.

The report by the National Taxpayer Advocate described the slow pace of addressing the identity theft cases as a “blemish” on the performance of the I.R.S., which is in the midst of a sweeping modernization campaign that aims to improve taxpayer services. While the I.R.S. was criticized by the watchdog for identify theft delays last year, the backlog has gotten only worse.

The I.R.S. is taking nearly two years to resolve identity theft victims’ assistance cases and has an inventory of approximately 500,000 cases, up from 484,000 cases in September.

“I.R.S. delays in resolving identity theft victim assistance cases are unconscionable,” Erin Collins, the taxpayer advocate, wrote in the report.

Calling on the agency to prioritize assistance for victims, she added: “Delays of nearly two years make a mockery of the right to quality service in the Taxpayer Bill of Rights.” The backlog of cases is likely to give congressional Republicans more fodder to criticize the I.R.S. and to call for cleaving back more of the $80 billion in funding that the agency received through the Inflation Reduction Act of 2022. Critics of the agency have been arguing that it is bloated and failing to put that money to good use.

Identity theft has long been a problem for the I.R.S. Criminals often steal taxpayers’ identifying information and file paperwork to fraudulently claim their refund. Taxpayers realize this only when they try to claim their refund, leading to a laborious process in which they have to submit an identity theft affidavit and a paper tax return before the agency will open a case to investigate the matter.

At that point, the victims of identify theft are left waiting for months before they can receive the money that they are owed.

The National Taxpayer Advocate said that most victims of identity theft were on the lower end of the income scale and often needed their refunds and refundable tax credits to pay their living expenses.

“The I.R.S. is revictimizing taxpayers by making them wait nearly two years to resolve their case and receive their refund,” the report said.

The report said that the problem was in part attributable to the agency’s redirecting resources aimed at improving its metrics that demonstrate how efficiently calls are being answered. However, the watchdog said that the I.R.S. was using an outdated methodology to track how quickly it answered calls and that most callers had been disconnected or routed to automated operators.

Despite the criticism, the watchdog noted that the I.R.S. was dedicating more staff to deal with identity fraud cases and that the 2024 tax filing season overall went “smoothly.”

The I.R.S. was originally given $80 billion to upgrade its technology and enforcement abilities, but Congress clawed back approximately $20 billion of those funds last year during a spending fight between Republicans and Democrats.

A report published last week by the Treasury Inspector General for Tax Administration said that the I.R.S. has so far spent $5.7 billion, or 10 percent, of its Inflation Reduction Act funding. About $2 billion of that money, however, was spent on normal operating expenses that the I.R.S. did not have sufficient resources to cover.

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