Billionaire Ken Griffin got apology from IRS, while everyday taxpayers struggle with 'unconscionable' problem

 Taxpayers are facing longer wait times for the IRS to resolve identity theft cases, a new report finds

It took hedge-fund billionaire Ken Griffin around a year and a half to get an apology from the Internal Revenue Service after he sued over the leak of his personal income-tax returns.

But everyday taxpayers who are victims of identity theft face longer waits than that to get a resolution from the agency, and their wait times are getting worse, according to a new watchdog report that calls the situation "unconscionable."

After crooks nab someone's personal data and file a phony tax return hoping to run off with refund money, it now takes almost two years for the IRS to verify and process the legitimate tax return amid a growing backlog of cases, according to the IRS Taxpayer Advocate Service, the agency's internal watchdog.

The approximately 22-month wait for the IRS to resolve identity-theft cases is up from around 19 months a year ago, said National Taxpayer Advocate Erin Collins. The backlog has grown from approximately 484,000 unresolved cases last year to around 500,000 cases as of April, the report said.

Griffin filed his lawsuit a year and a half ago in Miami federal court. The Citadel founder and CEO alleged the IRS failed to establish data-security safeguards, even after hearing concerns from Treasury Department watchdogs.

The case settled Monday, court papers show. The IRS apology contained an assurance that the agency has made "substantial investments in its data security to strengthen its safeguarding of taxpayer information."

Griffin sued the IRS after a government contractor stole thousands of high-profile individuals' tax returns, leading to a series of stories in the media outlet ProPublica about the tax strategies of the rich and famous.

The 39-year-old contractor, Charles E. Littlejohn, is now serving a five-year sentence in an Illinois federal prison and is appealing his case.So another chapter draws to a close for Griffin and the other high-profile taxpayers who were wronged by the leak.

Of course, a tax-record leak and a processing backlog are two separate issues. But the Taxpayer Advocate's report shows there's another set of wronged taxpayers in need of a better ending.

"These taxpayers are already victims of a bad actor who stole their identity and used it to file a fraudulent return. The IRS is revictimizing taxpayers by making them wait nearly two years to resolve their case and receive their refund," Collins wrote in the report.

In response, the IRS says it's working to address the backlog, which remains "one of the most significant ongoing service gaps."

Identity theft continues to plague Americans, not just in their taxes.

Nearly 11,000 new victims contacted the Identity Theft Resource Center last year, seeking help after misuse or attempted misuse of their personal information. While down year over year, the share of people reporting multiple crimes grew, the organization's report said.

Misused identities in connection to the federal government are a small share of the complaints. But when the Identity Theft Resource Center hears about these incidents, it mostly hears about taxes, the organization's report said.

For example, someone contacted the organization saying she believed she was a victim of identity theft because her son tried to claim her as a dependent, but the IRS rejected the claim, and erroneously said it had already received a return from her. Another victim said her accountant's system was hacked and someone had filed taxes on behalf of her, her husband and their 12-year-old son.

Complex cases

To be sure, Collins credits the IRS with running a largely successful and smooth 2024 tax-filing season as the agency goes through an overhaul. There are reasons to be hopeful about the future of the IRS, she said.

The Inflation Reduction Act of 2022 earmarked billions of dollars to improve operations, customer service and high-level enforcement at the agency after years of budget cuts and a shrinking staff.

But part of Collins' job is to identify potential trouble spots. And for her, identity-theft victim-assistance cases stand out.

To properly file a tax return in the wake of an identity theft, the victim needs to file an affidavit, along with a paper tax return, and then the IRS has to investigate the case, Collins said.

The wait is an issue because seven in 10 resolved cases last year involved low-income victims, she noted. That means many of these victims likely qualified for refundable tax credits and likely needed the refund money for living expenses, she added.

The backlog is partly explained because the IRS is getting more cases, Collins noted. But it's also because the IRS has moved staff members off the cases for other assignments like handling the phones during filing season, she said.

The IRS said Wednesday it is working on a range of ways to quicken resolutions in identity-theft cases, including more staff and more training for the cases.

"These are often complex cases that take time to resolve, but with increased funding made available by the Inflation Reduction Act, the IRS is now in a better position to resolve cases in a timelier manner," the agency said in a statement.

The IRS said it's tripled the closure rate on these cases since 2020 and "remains focused on preventing tax-related identity theft before it occurs."

Working with state agencies and the tax-preparation industry, the IRS says it has strengthened the system and protected millions of people - "but there is still more work to do."

Collins' report highlights that point.

The IRS had 5.5 million income-tax returns on pause at the end of the tax filing season. About half of those suspended returns were due to suspected identity theft after the spotted irregularities, she said.

https://www.morningstar.com/news/marketwatch/20240627280/billionaire-ken-griffin-got-an-apology-from-the-irs-while-everyday-taxpayers-struggle-with-this-unconscionable-problem