Don't Mess With Taxes

Millions are getting ready to file federal tax returns so they can collect refunds. Crooks are among them.

And things get even worse for the taxpayers whose identities were stolen and used to file false returns claiming fraudulent refunds.

The average time it took the Internal Revenue Service to resolve identity theft cases and issue refunds to the affected victims in fiscal year 2024 was two years, according the National Taxpayer Advocate’s 2024 annual report to Congress, issued today.

These delays impacted nearly half a million taxpayers, noted National Taxpayer Advocate (NTA) Erin M. Collins, and were even worse than the delays seen in fiscal year 2023, when cases took almost 19 months to resolve.

Collins has cited such delays in previous reports, calling the persistent delays in ID theft resolution “unconscionable.” She once again recommends the IRS prioritize identity theft case resolution by keeping all its Identity Theft Victim Assistance (IDTVA) employees focused on these cases, rather than reassigning them to other tasks during the filing season.

The goal, Collins says, should be to reduce identity theft case resolution times to 90 days or less.

Stop taxing victims on scammed money: In another tax crime situation, Collins calls on Congress to allow the limitation on theft loss deductions in the Tax Cuts and Jobs Act to expire so scam victims are not taxed on amounts stolen from them.

Many financial scams involve the theft of retirement assets, notes the National Taxpayer Advocate, and offers the following example.

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.

That nest egg loss is distressing enough, but the conned saver also now faces a tax bill on the stolen funds.

The tax code says that withdrawal of funds from a retirement account is treated as a distribution subject to income tax and, if the victim is younger than 59½, to a 10 percent  additional tax penalty. Thus, notes Collins, the victim may not only lose her life savings but also owe significant tax on the stolen funds.

Prior to the 2018 enactment of the Tax Cuts and Jobs Act, scam victims generally could claim a theft loss deduction to offset the stolen amounts included in gross income. The Republican tax reform measure, however, eliminated the deduction.

In her report, Collins recommends that Congress allow this TCJA limitation to expire so the theft deduction is again available in these circumstances.

More issues, possible legislative remedies: Collins’ citing of the TCJA change that has adversely impacted scam victims is just one of the 69 legislative recommendations in the NTA’s 2025 Purple Book.

The compilation, issued in conjunction with Collins’ annual report, suggests changes that Congress should make that would, in the Advocate’s assessment, strengthen taxpayer rights and improve tax administration, according to the NTA.

This is an important document because it reminds us that while the IRS tends to bear the brunt of taxpayer — and Capitol Hill — animosity and frustration, it is U.S. Representatives and Senators who actually craft the tax laws that we all are expected to follow.

Some of Collins’ other 2025 legislative suggestions that caught my eye include —

Adjust individual estimated tax payment deadlines so that they actually fall quarterly as per the calendar. Right now, the description of quarterly simply means there are four payments, but then are not due on dates that align with the standard calendar quarters. They are the 15th day of April, June, September, and the following January.

“These uneven cutoff dates are confusing to taxpayers and can make it difficult for them to calculate their net income; few self-employed individuals and small businesses keep their books and records based on these dates,” says Collins. “

Collins also has a couple more estimated tax suggestions:

1. Reclassify the addition to tax for underpaying estimated tax from a penalty to an interest charge.
2. Apply a single interest rate to underpayments of estimated tax for the entire period between each installment due dates.

Simplify the Earned Income Tax Credit (EITC) by separating it into a worker credit and a child credit.

The EITC is one of the federal government’s largest antipoverty programs, says Collins, but its eligibility requirements are complex. As a result, millions of eligible taxpayers fail to claim the EITC, while other taxpayers claim amounts for which they are not eligible. Splitting it into two credits would make proper claims easier, and should reduce improper ones.

Collins suggests a worker credit that, much like the current EITC, would phase in as a percentage of earned income, reach a plateau, and then phase out. But unlike the current EITC, the credit amount would depend solely on income, and would not vary based on whether the taxpayer is claiming one or more qualifying children. Increasing the worker component of the EITC would provide a greater incentive to work, which is a main objective of the credit. And since the IRS receives W-2 forms and other information reporting documents directly from employers and other payors of income, the agency can accurately verify income amounts for EITC recipients who are employees, who constitute by far the largest group of EITC claimants.

The recommended child credit component would be designed as a fixed amount per qualifying child. It would be subject to an adjusted gross income phase-out, and would replace the portion of the existing EITC that is based on the number of qualifying children. It could be consolidated with or replace the Child Tax Credit (CTC), says Collins. This could be accomplished in various ways, and proposals to expand the CTC might provide a starting point for developing this proposed new EITC child credit.

In addition, Collins recommends Congress remove age limits for claiming the EITC, and treat unemployment compensation as earned income.

Authorize the IRS to establish minimum competency standards for federal tax return preparers and revoke the identification numbers of sanctioned preparers. The IRS receives more than 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 (e.g., certified public accountants, attorneys, and Enrolled Agents), most tax return preparers are not credentialed. Numerous studies have found that non-credentialed preparers prepare inaccurate returns disproportionately, says Collins. These errors cause some taxpayers to overpay their taxes and other taxpayers to underpay, which subjects them to penalties and interest charges.

The EITC is one tax area where non-credentialed preparers are regularly shown to drive much of the high improper payments rate. Collins notes that in fiscal year 2023, 33.5 percent of EITC payments, amounting to $21.9 billion, were estimated to be improper. Among tax returns claiming the EITC prepared by paid tax return preparers, 96 percent of the total dollar amount of EITC audit adjustments was attributable to returns prepared by non-credentialed preparers.

As members of Congress embarks this session on how to deal with the expiring TCJA provision, they would do themselves and us taxpayers a favor by first reviewing Collins suggestions.

You also might find these items of interest:

• Tax ID theft victims waiting 2 years for refunds
• Tax preparer regulation among ETAAC’s 12 recommendations
• Don't overlook the EITC, a valuable refundable tax credit that often goes unclaimed

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