Taxpayer woes: Waiting nearly two years for refunds after ID theft, scams and more
Though most people had no trouble at all, roughly 1.2 million taxpayers faced incredibly long waits last year for their tax refund cash after getting hit by tax-related ID theft or by claiming frivolous credits after falling for tax schemes and scams, according to a new report by the National Taxpayer Advocate.
The annual report to Congress, by law, must identify the 10 most serious problems taxpayers face in their dealings with the IRS and make administrative and legislative recommendations to address those problems.
This year, taxpayer headaches included resolving self-reported identity theft cases, social-media-driven tax schemes, delays with amended returns and other tax-related paperwork, and more than 1 million in claims that have yet to be processed involving a complex, pandemic-related employee retention credit for businesses.
How some taxpayers wait 22 months for tax refunds
Nearly a half of a million taxpayers slogged through an average 22-month wait for their tax refunds in 2024 after being victimized by tax-related identity theft, waiting even months longer than in the past, according to details in the annual report made this week to Congress by the National Taxpayer Advocate.
The wait had been an average of 19 months in fiscal year 2023, a delay that National Taxpayer Advocate Erin Collins then called “unconscionable" in her annual report last year to Congress, a word she used again as the wait got worse in fiscal year 2024.
"These victims are still experiencing unconscionable delays waiting for the IRS to process their returns and pay their refunds with no immediate resolution in sight," Collins said.
The report noted that hundreds of thousands of taxpayers fall victim to tax-related identity theft each year through no fault of their own. And they're stuck navigating a frustrating process with the IRS.
"I strongly encourage the IRS to fix this problem once and for all during the coming year," Collins said in her 2024 report to Congress, released Wednesday morning.
Collins is recommending the IRS prioritize identity theft case resolution by keeping employees who address such issues 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.
Collins acknowledged in her latest report that the Internal Revenue Service shared some good news when it detailed a strategy to prioritize resolving cases where a refund is due before addressing ID-related cases where the taxpayer owes money.
In the past, the IRS would address ID theft cases following its traditional “first in, first out” approach. It didn't matter if the victim was wondering when they'd finally get a big tax refund to pay off their bills.
An ultra-long wait hurts taxpayers who depend on that refund cash. Families, particularly those with low-paying jobs, face financial hardship if they're waiting endlessly for money from key tax credits, such as the earned income tax credit.
The IRS is dealing with two kinds of ID theft cases overall.
One category involves tax returns that are stopped during processing by IRS identity theft detection filters that are trying to thwart criminals who create fake returns to steal refund cash. The IRS doesn’t know if the return is submitted by an ID thief at that point. In most cases, the returns that are stopped end up being legitimate and the IRS is able to resolve these cases in six months or less.
Another, more complex category involves actual theft of a refund. In these cases, the taxpayer files a tax return, but the return is rejected because a tax refund has already been paid out to the thief. It’s taking the IRS close to two years to work with victims to resolve these situations.
How some scams are hurting taxpayers and what IRS can do
More taxpayers also are falling victim to tax-related scams, some that are pushed on social media, which trigger extra-long delays in getting their refunds.
Increasingly, tax filers face massive delays in getting a legitimate tax refund after scammers push bad tax advice on social media and elsewhere.
At the end of fiscal year 2024, the National Taxpayer Advocate report noted, about 739,000 taxpayers were still waiting for the IRS to unfreeze their federal income tax refund after they claimed potential frivolous credits.
"Every year, people from all walks of life fall victim to increasingly complex tax-related scams that are both sophisticated and financially devastating," the report stated.
Such scams and schemes surged across social media, according to the IRS. Last year, the IRS launched a campaign to warn taxpayers about the dangers of falling victim to schemes.
"Victims often experience shattered financial security, indefinitely frozen IRS refunds that disrupt their lives, and confusion due to a lack of understanding of the process and consequences," the report said.
The IRS faces significant challenges addressing the "increasing variety, sophistication, and evolving nature of tax scams," the report noted.
Two distinct categories of scams exist.
There are tax-related scams in which taxpayers are misled into claiming tax credits they are not eligible for. The scams, the report said, are often fueled by "misinformation on social media, aggressive marketing tactics, and unqualified tax preparers." The consumer who falls for the scheme ends up unable to get the actual tax refund they're legitimately owed when the IRS freezes the refund as the problem involving the credits is addressed.
In some cases, the tax filer will need to first authenticate their identity and then file an amended return to remove the improperly claimed credit as part of the process. The amended return, the IRS has stressed, won't go through in these cases until after the taxpayer authenticates their identity.
These scams, the IRS has said, centered on misusing the fuel tax credit, the sick and family leave credit and household employment taxes.
Then there are scams in which fraudsters manipulate taxpayers into withdrawing large amounts of money from tax-deferred retirement accounts to address bogus issues.
Some victims "not only lose their retirement savings but also face substantial tax liabilities and early withdrawal penalties," according to the report. The report noted that the "IRS must continue to strengthen its efforts to combat scams, protect taxpayers, and enhance public awareness."
One of the National Taxpayer Advocate's recommendations involves the creation of a specialized Scam Prevention and Victim Assistance Office where IRS staff would be trained to offer assistance to scam victims and provide administrative remedies within the IRS.
Tax headaches for those claiming the employee retention credit
Congress created the complex employee retention credit to help struggling businesses and exempt organizations recover from losses during the COVID-19 pandemic. But fast-talking marketers triggered a slew of ineligible claims that have led to delays for those who are owed that money legitimately.
According to the 2024 report to Congress, the IRS had a backlog of 1.2 million claims as of Oct. 26, 2024.
Many of these claims had been pending for more than a year after the IRS implemented a moratorium on processing claims on Sept. 14, 2023.
In September 2023, the IRS took the unusual step of halting the processing of new claims for the employee retention credit after an onslaught of rising scams and improper claims.
Misleading marketing drove many tax filers to claim credits when they weren't eligible, according to IRS officials. The IRS acknowledged that the problem had slowed processing of legitimate claims for many businesses.
IRS Commissioner Danny Werfel said in September 2023 that 3.6 million claims for the credit had been filed − including more than 600,000 claims received during a 90-day time frame in 2023.
A deluge of new claims had hit at once for a credit designed to address the economic hardships during the pandemic.
Werfel noted that the claims were arriving nearly two years after the 2021 eligibility date. He suggested that the credit had become a "gravy train for promoters, flooding the IRS with ineligible applications."
Last August, the IRS gave an update on the problem, including disclosing that the IRS had in recent weeks sent out 28,000 disallowance letters to businesses whose claims showed a high risk of being incorrect.
"The IRS estimates that these disallowances will prevent up to $5 billion in improper payments," according to an IRS statement last year. "Thousands of audits are underway, and 460 criminal cases have been initiated."
Then the IRS said it had identified 50,000 valid employee retention credit claims and planned to quickly move those claims into the pipeline for payment processing. Those payments were considered part of a low-risk group of claims.
The National Taxpayer Advocate's report noted that the IRS has valid concerns about paying ineligible claims. But the report said the slow processing time is harming many eligible businesses that need that money to pay expenses.
"Additional concerns include lack of transparency for businesses trying to track the status of their claims," the report said.
Businesses also have received "confusing disallowance letters that have omitted critical information."
After the National Taxpayer Advocate’s report went to press, Collins noted Wednesday, the IRS commissioner announced in mid-December that about 500,000 additional claims would be processed in 2025, but the details and timing of the refunds are still unknown.
A 'glacial pace' for processing of amended returns
Taxpayers across the country can be hit by all sorts of headaches, too, by IRS problems related to return processing. The report highlighted a long list of potential snags.
"Taxpayers can experience challenges with rejections of electronically filed returns, slow processing of paper returns, difficulty correcting errors after filing, (and) the glacial pace for processing of amended returns," among other delays, according to the report.
The report noted that the Taxpayer Advocate Service has listed processing delays among the most serious problems facing taxpayers in the past five Annual Reports to Congress, even before the onset of the COVID-19 pandemic.
The report also highlighted some upbeat developments.
“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 wrote.
The mountain of paperwork that piled up at the IRS during the pandemic is gone. New chatbot functions and other e-filing-related tools are contributing to a smoother process as millions of taxpayers search for answers. And in general, most taxpayers did not wait month after month for their tax refunds last year, according to the 2024 annual report to Congress.
"In 2024, taxpayers and practitioners experienced better service, generally received timely refunds, and faced shorter wait times to reach customer service representatives," according to the annual report.
For example, 9 million more telephone calls were answered by employees in fiscal 2024 as compared with 2022 when IRS phone service was much worse.
The IRS made major strides, according to the report, toward improving its taxpayer services and information technology systems.
More than 800,000 taxpayers in 2024, for example, were able to use a virtual assistant chatbot offered through IRS.gov to get answers to questions. "Chatbots enable users to obtain information by typing queries into the IRS website," the report noted.
And taxpayers now can submit more than 30 forms to the IRS directly from their mobile devices − an important development given that an estimated 15% of Americans rely solely on mobile phones for internet access. "Mobile functionality is a game-changer for them," the report noted.
Many improvements highlighted, Collins said, were made possible by multiyear funding provided by Congress, and they require this funding to continue. In her preface to the report, Collins emphasized the need for adequate funding to support crucial taxpayer services and technology upgrades.
"The headline from the Inflation Reduction Act was that the IRS received about $79 billion in additional funding over a ten-year period," she wrote.
"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. 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," Collins said.
Contact personal finance columnist Susan Tompor: stompor@freepress.com. Follow her on X @tompor.