After several turbulent tax years marked by the uncertainty of COVID-19 and its associated tax credit modifications and other changes to the tax code, plus a rocky transition to remote work for Internal Revenue Service employees, the IRS began this tax season on a much more solid footing.
Thanks in part to an infusion of new funding, the IRS has made tremendous gains in addressing the backlogs and hiring challenges of recent years that were hurting customer service and crippling the taxpayer experience. According to Treasury Department data, the IRS increased its level of service from 15 percent in 2022 to 87 percent last year, reduced its backlog of unprocessed paper returns by 80% and hired more than 16,405 new staff in FY 2023. After decades of underfunding and declining service, these are meaningful improvements for an agency that turns 161 years old this year.
Despite these important advancements, there is clearly more that can be done to address the challenges that still plague our tax administration system, most notably fraudulent activity that hurts taxpayers and the entire system. Attempted tax fraud is at record levels and shows no signs of slowing down: In 2023, the IRS flagged more than 1 million tax returns for potential fraud, and the number of confirmed fraudulent filings rose more than 30 percent from the previous year. Following recent concerns raised by tax preparers, the industry quickly worked with the IRS to address improper Employee Retention Credit claims and the agency temporarily stopped processing the credit amid a “surge of questionable claims” and investigated at least $2.8 billion in potentially fraudulent claims.
But it doesn’t stop there. Sophisticated criminal enterprises also use individual self-preparation software to scam taxpayers out of their refunds, and “ghost preparers” submit tax returns without signing the return or otherwise providing valid preparer identification credentials, selling unsuspecting filers on the promise of higher refunds or undeserved tax credits and helping them avoid their full tax obligations. Beyond the often-unaware taxpayer victims, ghost preparers and refund fraud hurt all Americans by taking money out of the U.S. Treasury and harming legitimate businesses and individuals across the tax ecosystem.
This mix — a combination of inefficiencies, outdated systems and illicit activity — creates taxpayer frustration and exacerbates the tax gap, which the IRS projects rose to $688 billion in 2021. In a recent letter to Congress, IRS Commissioner Danny Werfel reported that IRS research shows “unscrupulous” preparers disproportionately exploit vulnerable groups, including low-income filers, filers of color, and those with limited English proficiency.
While the IRS’ Direct File pilot has made the most headlines this year, the program remains highly limited: most taxpayers are ineligible, based on where they live or the complexity of their tax situations. It is therefore essential not to lose sight of additional ways to strengthen the tax ecosystem for the hundreds of millions of Americans who will use one of the many other options available to file their returns, including through a trained and IRS-registered tax preparation professional.
Now is the time to make robust, sustainable changes in our tax system to better address bad actors that take money out of the pockets of hardworking taxpayers or tax revenue away from essential services. At a time when high interest rates are putting greater stress on the federal deficit, investments in closing the tax gap are critically important: The Treasury Department estimates that every additional dollar dedicated to tax enforcement has a 6:1 return on investment, and the IRS recently projected new IRS enforcement resources would bring in $561 billion in additional tax revenue over 10 years.
The IRS has proven its ability before to partner with the tax industry to tackle challenges that neither the agency nor tax prep companies can fully address on their own: In 2015, the agency formed the Security Summit to comprehensively tackle issues related to identity theft refund fraud. With fraudulent returns once again on the rise, we’re overdue for renewed public-private partnerships between the IRS and the tax prep industry to weed out bad actors that try to exploit taxpayers.
Another idea worthy of greater consideration is universal national standards for paid tax preparers. At Jackson Hewitt, our tax professionals must comply with strict training and education standards, but not everyone plays by these rules. Bipartisan congressional legislation has previously been proposed that would enable the IRS to tackle this issue by establishing minimum standards for tax preparers, helping to address the ways “ghost preparers” worsen the tax gap.
The IRS has made significant strides in recent years in putting taxpayers first. As a leader in the tax prep industry, Jackson Hewitt stands ready to partner with the IRS to continue that momentum as part of a newfound push to stamp out fraud and make tax filing safer for millions of Americans.
