Accounting
Taxpayer Advocate spotlights IRS delays in ERC claims and ID theft assistance, but sees improvements in IRS
National Taxpayer Advocate Erin Collins released her
“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. “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.”
However, the IRS faces a
In her report, Collins criticized the long wait times for legitimate claims. She noted that as of Oct. 26, 2024, the IRS faced a backlog of about 1.2 million ERC claims, with many claims pending for over 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, Collins noted. Other 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. After the National Taxpayer Advocate’s report went to press, Werfel announced in mid-December he expects that approximately 500,000 additional claims will be processed in 2025, but the details and timing of the refunds are still to be determined, Collins noted.
Identity theft victim assistance
The report also pointed to continuing delays in resolving identity theft cases. For cases closed by the IRS’s Identity Theft Victim Assistance unit in fiscal year 2024, the average time it took the IRS to resolve ID cases and issue refunds to the affected victims was nearly two years. The delays affected 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 called the delays “unconscionable” and recommended the IRS prioritize identity theft case resolution by keeping all IDTVA employees focused on these cases instead of reassigning them to other tasks during the filing season. She urged the IRS to reduce case resolution times to 90 days or less.
Taxpayer service and tech upgrades
Collins stressed the need for adequate funding to support critical taxpayer services and technology upgrades. She noted that the bulk of the nearly $80 billion in multiyear IRS funding provided by the Inflation Reduction Act was allocated for tax law enforcement and has been controversial. She also notes, however, that there has been bipartisan support for the smaller amounts allocated for taxpayer services and IT modernization. Stressing the importance of taxpayer services funding, she urged Congress, if it cuts IRA enforcement funding, not to make commensurate cuts to taxpayer services and IT. Congress should not, Collins urged, “inadvertently throw out the baby with the bathwater.”
The report pointed to a number of 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.
Business Systems Modernization funding has enabled taxpayers to resolve issues without the involvement of an IRS employee. With these improvements, taxpayers can now get 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. The IRS now allows taxpayers to submit 30 of the most common taxpayer forms from mobile devices, helping the estimated 15% of Americans who rely solely on their smartphones for internet access.
Tax return processing delays
The report noted that continuing delays in IRS return processing are frustrating taxpayers and causing tax refund delays. The IRS receives more than 10 million paper-filed Forms 1040 each year and over 75 million paper-filed returns and forms. Until recently, IRS employees had to manually transcribe the data from those returns into IRS systems. While the IRS has made progress on 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. E-filed returns are sometimes rejected, and 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 discusses the strain this puts on taxpayers, especially low-income taxpayers who are eligible for refundable Earned Income Tax Credit benefits. The Taxpayer Advocate Service 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.
While taxpayer service has improved across the IRS’s three main channels — telephone, in-person and online — the report found significant service gaps remain. The IRS achieved an 88% “Level of Service” on its Accounts Management lines during the 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 level of service for all toll-free lines in FY 2024 was just 56%, with only 31% of callers reaching an assistor. Of the 6.2 million calls the IRS received from taxpayers whose returns had been stopped by the IRS’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.
Werfel response
IRS Commissioner Danny Werfel responded to the report. “The National Taxpayer Advocate’s report recognizes that the IRS has made historic progress over the last two years improving phone, online and in-person services by reducing wait times on toll-free lines, providing enhanced technology and adding new digital tools,” Werfel said in a statement. “These improvements reflect what a well-funded IRS can do to help taxpayers and tax professionals on many issues, including delivering tax refunds quickly to more than 100 million taxpayers. It’s important to continue that momentum because we recognize the agency’s work isn’t done – not by a longshot. It’s vital that the IRS continue this progress to better serve taxpayers and the nation. The IRS has already made improvements in many of the areas outlined by the Taxpayer Advocate and will continue to do so in 2025. But as the Taxpayer Advocate noted, having sufficient resources is critical to the IRS since so many of our efforts require improving digital options and capabilities while having enough staff to process tax returns, manage correspondence and answer phone calls year-round.”
Employee recruitment challenges
The report pointed to continuing challenges in employee recruitment, hiring, training and retention at the IRS. It noted the IRS faces ongoing difficulties in hiring, training and maintaining employees. Job postings aren’t consistently targeted to reach the desired candidates. The IRS often takes several months to hire new employees, leading some candidates to accept other offers. New hires require a great deal of training before they can become productive employees, and experienced employees often need to be reassigned to train them. 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. The report recommended the IRS explore alternative recruitment platforms, review pay disparities and implement strategies to improve employee retention.
Minimum competency for preparers
The report also recommended Congress authorize the IRS to establish minimum competency standards for federal tax return preparers and revoke the identification numbers of sanctioned preparers. It noted the IRS receives over 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 are not 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, the report noted. 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.
The report noted that 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 likewise recommends Congress provide this authorization as well as authorization for the Treasury Department to revoke the Preparer Tax Identification Numbers of preparers who have been sanctioned for improper conduct.
The report called for expanding 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, as the filing fees are relatively high, rules of civil procedure are complex, the judges generally do not 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 do not 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 recommended Congress expand the jurisdiction of the Tax Court to give taxpayers the option to litigate all tax disputes, including refund claims, in that forum.
Other recommendations in the report included enabling the Low Income Taxpayer Clinic 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 cannot 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 recommended 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.
The report also recommended requiring the IRS to timely process claims for refund or credit. It noted 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. The report recommended 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.
The report also recommended allowing the limitation on theft loss deductions in the Tax Cuts and Jobs Act to expire so scam victims aren’t taxed on the amounts stolen from them. Many financial scams involve the theft of retirement assets, the report noted. 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 Tax Cuts and Jobs Act eliminated the deduction. TAS recommends Congress allow this TCJA limitation to expire so the theft deduction is again available in these circumstances. Congress is currently planning to take up the expiring provisions of the Tax Cuts and Jobs Act this year.
The Financial Accounting Standards Board met this week to discuss its projects on accounting for transfers of cryptocurrency assets and enhancing the disclosures around certain digital assets, such as stablecoins.
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During Wednesday’s meeting, FASB’s board made certain tentative decisions, according to a
At a future meeting, the board plans to consider clarifying the derecognition guidance for crypto transfer arrangements to assess whether the control of a crypto asset has been transferred.
FASB also began deliberations on the
The board decided to provide illustrative examples in Topic 230, Statement of Cash Flows, to clarify whether certain digital assets such as stablecoins can meet the definition of cash equivalents. It also decided to include the following concepts in the illustrative examples:
- Interpretive explanations that link to the current cash equivalents definition;
- The amount and composition of reserve assets; and,
- The nature of qualifying on-demand, contractual cash redemption rights directly with the issuer.
FASB plans to clarify that an entity should consider compliance with relevant laws and regulations when it’s creating a policy concerning which assets that satisfy the Master Glossary definition of the term “cash equivalents“ will be treated as cash equivalents.
“I agree with the staff suggestion to look at examples,” said FASB vice chair Hillary Salo. “From my perspective, I think that is going to help level the playing field. People have been making reasonable judgments. I agree with that. And I think that this is really going to help show those goalposts or guardrails of what types of stablecoins would be in the scope of cash equivalents, and which ones would not be in the scope of cash equivalents. I certainly appreciate that approach, and I think it has the least potential impact of unintended consequences, because I do agree with my fellow board members that we shouldn’t be changing the definition of cash equivalents, and it’s a high bar to get into the cash equivalent definition.”
“I’m definitely supportive of not changing the definition of cash equivalents,” said FASB chair Richard Jones. “I believe that’s settled GAAP in a way, and we’re not really seeing a call to change it for broader issues. I am supportive of the example-based approach. The challenge with examples, though, is everybody’s going to want their exact pattern, but that’s not what we’re doing.”
The examples will explain the rationale for how digital assets such as stablecoins do or do not qualify as cash equivalents and give a roadmap for other types of digital assets with varying fact patterns to be able to apply.
“We really don’t want to be as a board facing a situation where something was a cash equivalent and then no longer is at a later date,” said Jones. “That’s not good for anyone, so keeping it as a high bar with certain rigid criteria, I think, is fine.”
Stablecoins are supposed to be pegged to fiat currencies such as U.S. dollars and thus provide more stability to investors. “In my view, while a stablecoin may meet the accounting definition established for cash equivalents, not every one of those stablecoins in the cash equivalent classification represents the same level of risk,” said FASB member Joyce Joseph.
She noted that the capital markets recognize the distinctions and have established a Stablecoin Stability Assessment Framework to evaluate a stablecoin’s ability to maintain its peg to a fiat currency. Such assessments look at the legal and regulatory framework associated with the stablecoin, and provide investors with information that could enable them to do forward-looking assessments about the stability of the stablecoin.
“However, for an investor to consider and utilize such information for a company analysis the financial statement disclosures would need to include information about the stablecoin itself,” Joseph added. “In outreach, the staff learned that investors supported classifying certain stablecoins as cash equivalents when transparent information is available about the entities at which the reserve assets are held. Therefore, in my view, taking all of this into consideration a relevant and informative company disclosure would include providing investors with the name of the stablecoin and the amount of the stablecoin that is classified as a cash equivalent, so investors can independently assess the liquidity risks more meaningfully and more comprehensively by utilizing broader information that is available in the capital markets and its emerging information.”
Such information could include the issuer, reserves, governance and management, she noted, so investors would get a more holistic look at the risks that holding the stablecoin would entail for a given company.
The board decided to require all entities to disclose the significant classes and related amounts of cash equivalents on an annual basis for each period that a statement of financial position is presented.
Entities should apply the amendments related to the classification of certain digital assets as cash equivalents on a modified prospective basis as of the beginning of the annual reporting period in the year of adoption.
FASB decided that entities should apply the amendments related to the disclosure of the significant classes and amounts of cash equivalents on a prospective basis as of the date of the most recent statement of financial position presented in the period of adoption.
The board will allow early adoption in both interim and annual reporting periods in which financial statements have not been issued or made available for issuance.
FASB also decided to permit entities to adopt the amendments to be illustrated in the examples related to the classification of certain digital assets as cash equivalents without the need to perform a preferability assessment as described in Topic 250, Accounting Changes and Error Corrections.
The board directed the staff to draft a proposed accounting standards update to be voted on by written ballot. The proposed update will have a 90-day comment period.
Senators introduced several pieces of tax-related legislation this week, including measures aimed at improving customer service at the Internal Revenue Service, cracking down on tax evasion and curbing the carried interest tax break, in addition to efforts in the House to repeal the Corporate Transparency Act.
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Senators Bill Cassidy, R-Louisiana, and Mark Warner, D-Virginia, teamed up on introducing a bipartisan bill, the
The bill would establish a dashboard to inform taxpayers of backlogs and wait times; expand electronic access to information and refunds; expand callback technology and online accounts; and inform individuals facing economic hardship about collection alternatives.
“Taxpayers deserve a simple, stress-free experience when dealing with the IRS,” Cassidy said in a statement Wednesday. “This bill makes the process quicker and easier for taxpayers to get the information they need.”
He also mentioned the bill during a
“I’m happy to meet with the team … and do all I can to make it as good as you want it to be,” said Bisignano.
“My bill would equip the IRS with the legislative mandate to create an online dashboard so that taxpayers can monitor average call wait time and budget time accordingly,” said Cassidy. He noted that the bill would allow a callback for taxpayers that might need to wait longer than five minutes to speak to a representative, and establish a program to identify and support taxpayers struggling to make ends meet by providing information about alternative payment methods, such as installments, partial payments and offers in compromise.
“I know people are kind of desperate and don’t know where to turn for cash, so I think this could really ease anxiety,” he added. “This legislation is bipartisan and is likely to pass this Congress.”
Cassidy and Warner
“Taxpayers shouldn’t have to jump through hoops to get basic answers from the IRS — and in the last year, those challenges have only gotten worse,” Warner said in a statement. “I am glad to reintroduce this bipartisan legislation on Tax Day to ease some of this frustration by increasing clear communication and making IRS resources more readily available.”
Stop CHEATERS Act
Also on Tax Day, a group of Senate Democrats and an independent who usually caucuses with Democrats teamed up to introduce the Stop Corporations and High Earners from Avoiding Taxes and Enforce the Rules Strictly (Stop CHEATERS) Act.
Senate Finance Committee ranking member Ron Wyden, D-Oregon, joined with Senators Angus King, I-Maine, Elizabeth Warren, D-Massachusetts, Tim Kaine, D-Virginia, and Sheldon Whitehouse, D-Rhode Island. The bill would provide additional funding for the IRS to strengthen and expand tax collection services and systems and crack down on tax cheating by the wealthy.
“Wealthy tax cheats and scofflaw corporations are stealing billions and billions from the American people by refusing to pay what they legally owe, and far too many of them are getting a free pass because Republicans gutted the enforcement capacity of the IRS,” Wyden said in a statement. “A rich tax cheat who shelters mountains of cash among a web of shell companies and passthroughs is likelier to be struck by lightning than face an IRS audit, and Republicans want to keep it that way. This bill is about making sure the IRS has the resources it needs to go after wealthy tax cheats while improving customer service for the vast majority of American taxpayers who follow the law every year.”
Earlier this week. Wyden also
The Stop CHEATERS Act would provide the IRS with additional funding for tax enforcement focused upon high-income tax evasion, technology operations support, systems modernization, and taxpayer services like free tax-payer assistance.
“As Congress seeks ways to fund much-needed policy priorities and address our growing national debt, there is one common sense solution that should have unanimous bipartisan support: let’s enforce the tax laws already on the books,” said King in a statement. “Our legislation will make sure the IRS has the resources it needs to confront the gap between taxes owed and taxes paid – while ensuring that our tax enforcement professionals are focused on the high-income earners who account for the most tax evasion. This is a serious problem with an easy solution; let’s pass this legislation and make sure every American pays what they owe in taxes.”
Carried interest
Wyden, King and Whitehouse also teamed up on another bill Thursday to close the carried interest tax break for hedge fund managers that
Carried interest is a form of compensation received by a fund manager in exchange for investment management services, according to a
Under the bill, the
“Our tax code is rigged to favor ultra-wealthy investors who know how to game the system to dodge paying a fair share, and there is no better example of how it works in practice than the carried interest loophole,” Wyden said in a statement. “For several decades now we’ve had a tax system that rewards the accumulation of wealth by the rich while punishing middle-class wage earners, and the effect of that system has been the strangulation of prosperity and opportunity for everybody but the ultra-wealthy. There are a lot of problems to fix to restore fairness and common sense to our tax code, and closing the carried interest loophole is a great place to start.”
Repealing Corporate Transparency Act
The House Financial Services Committee is also planning to markup a bill next Tuesday that would fully repeal the Corporate Transparency Act, which has already been significantly
If enacted, the repeal would eliminate beneficial ownership reporting requirements, removing a transparency measure designed to help law enforcement and national security officials identify who is behind U.S. companies.
“This repeal would turn the United States back into one of the easiest places in the world to set up anonymous shell companies, something Congress worked for years to fix,” said Erica Hanichak, deputy director of the FACT Coalition, in a statement. “These entities are routinely used to facilitate corruption, financial crime, and abuse. Rolling back the CTA doesn’t just weaken transparency, it signals to bad actors around the world that the U.S. is once again open for illicit business.”
The Internal Revenue Service rarely penalizes taxpayers who have high balances in foreign bank accounts and fail to file the proper forms, according to a new report.
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The
Taxpayers with specified foreign financial assets that meet a certain dollar threshold are also required to report the information to the IRS by filing Form 8938. Failure to file the form can result in penalties of up to $60,000. However, TIGTA’s previous reports have demonstrated that the IRS rarely enforces these penalties.
The IRS created an Offshore Private Banking Campaign initiative to address tax noncompliance related to taxpayers’ failure to file Form 8938 and information reporting associated with offshore banking accounts, but it’s had limited success.
Even though the initiative identified hundreds of individual taxpayers with significant foreign bank account deposits who failed to file Forms 8938, the campaign only resulted in relatively few taxpayer examinations and a small number of nonfiling penalties. The campaign identified 405 taxpayers with significant foreign account balances who appeared to be noncompliant with their FATCA reporting requirements.
The IRS used two ways to address the 405 noncompliant taxpayers: referral for examinations and the issuance of letters to them.
- 164 taxpayers (who had an average unreported foreign account balance of $1.3 billion) were referred for possible examination, but only 12 of the 164 were examined, with five having $39.7 million in additional tax and $80,000 in penalties assessed.
- 241 noncompliant taxpayers (who had an average unreported account balance of $377 million) received a combination of 225 educational letters (requiring no response from the taxpayers) and 16 soft letters (requiring taxpayers to respond). None of the 241 taxpayers were assessed the initial $10,000 FATCA nonfiling penalty.
“While taxpayers can hold offshore banking accounts for a number of legitimate reasons, some taxpayers have also used them to hide income and evade taxes,” said the report.
Significant assets and income are factors considered by the IRS when assessing whether taxpayers intentionally evaded their tax responsibilities, the report noted. Given the large size of the average unreported foreign account balances, these taxpayers probably have higher levels of sophistication and an awareness of their obligation to comply with the law.
TIGTA believes the IRS needs to establish specific performance measures to determine the effectiveness of the FATCA program. “If the IRS does not plan to enforce the FATCA provisions even where obvious noncompliance is identified, it should at least quantify the enforcement impact of its efforts,” said the report. “This will ensure that IRS decision makers have the information they need to determine if the FATCA program is worth the investment and improves taxpayer compliance.
TIGTA made three recommendations in the report, including revising Campaign 896 processes to include assessing FATCA failure to file penalties; assessing the viability of using Form 1099 data to identify Form 8938 nonfilers; and implementing additional performance measures to give decision makers comprehensive information about the effectiveness of the FATCA program. The IRS disagreed with two of TIGTA’s recommendations and partially agreed with the remaining recommendation. IRS officials didn’t agree to assess penalties in Campaign 896 or with implementing performance measures to assess the effectiveness of the FATCA program.
“From our perspective, TIGTA’s conclusions regarding IRS Campaign 896 are based, in part, on a misguided premise and overgeneralizations, including the treatment of ‘potential noncompliance’ as tantamount to ‘egregious noncompliance’ that warrants a monetary penalty without contemplating the variety of justifications that may exempt a taxpayer from having to file Form 8938,” wrote Mabeline Baldwin, acting commissioner of the IRS’s Large Business and International Division, in response to the report.
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