IRS had some problems with tax relief for former hostages

The Internal Revenue Service incorrectly labeled some taxpayers as hostages when providing tax relief, or failed to remove a special indicator for them after they were released from captivity, according to a new report.

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The report, released Thursday by the Treasury Inspector General for Tax Administration, follows up on tax relief offered by the IRS after the Oct. 7, 2023 attack by Hamas on Israel in which approximately 254 people, including 12 American citizens, were taken hostage. Some were released only last year. 

TIGTA initiated the evaluation after hearing reports that individuals who had been held captive abroad were being assessed penalties and interest after returning to the U.S. for not filing tax returns on a timely basis or paying debts owed to the IRS. It noted that the IRS provides tax relief to taxpayers who are or were held captive, deferring collection actions and abating any penalties assessed during the time the taxpayer is held captive. The penalties are supposed to continue to be abated for an additional six months after the taxpayer is released. 

In January 2025, the IRS implemented new procedures to improve this process. In January and April 2025, the State Department and the Federal Bureau of Investigation notified the IRS that 11 individuals were wrongfully detained or held hostage abroad. They should have had a hostage indicator placed on their tax account so the IRS would know to provide appropriate tax relief.

In March of last year, the IRS also developed guidance to assist hostages and wrongfully detained taxpayers. In addition, the IRS set up a dedicated phone resource where a live assistor can provide hostage assistance to affected taxpayers.

However, prior to implementation of the new process, TIGTA found that 75 individuals were either incorrectly labeled as a hostage or did not have the indicator removed from their account after they were released from captivity. TIGTA also found that recently released hostages did not receive tax relief. For instance, the IRS did not abate penalties on some taxpayer accounts after being notified that the individuals were released from captivity.

In addition, TIGTA found instances where the hostage indicator was not preventing account activity on tax accounts, such as postings of original tax returns and additional tax assessments.

“Taxpayers returning to the United States after being wrongfully detained or held hostage abroad should not be burdened with improper penalties or letters demanding payment,” said the report. “Conversely, providing tax relief to taxpayers who are incorrectly labeled as a hostage can negatively burden the taxpayer. The incorrect labeling can prevent a tax return from posting or restrict notification of debts owed.”

TIGTA made five recommendations in the report, suggesting the IRS should review all taxpayer accounts that had a hostage indicator but were not identified by partner agencies, and take appropriate actions after removing the indicator. The IRS should also establish a process to review and monitor taxpayer accounts with a hostage indicator.

TIGTA also said the IRS should develop procedures to reengage taxpayers released from captivity to ensure that penalties are properly abated; restrict who can add or remove a hostage indicator to a taxpayer’s account; ensure the hostage indicator is functioning as intended; and, in the interim, consider providing additional identity theft protection for impacted taxpayers or their representatives. The IRS agreed with four of TIGTA’s recommendations and partially agreed with the recommendation that involved providing additional identity theft protection.

“When U.S. nationals are wrongfully detained abroad or taken hostage by non-state actors, the IRS has a critical responsibility to ensure these individuals or their representatives are not further burdened by unnecessary tax compliance actions,” wrote Lia Colbert, commissioner of the IRS’s Small Business/Self-Employed division, in response to the report. “The tax relief available to victims, including the suspension of collection actions and penalty abatement, reflects our obligation to uphold taxpayer rights during extraordinary circumstances.”

Last September, the IRS postponed until Sept. 30, 2026, a wide range of deadlines for filing federal returns, making tax payments and performing other time-sensitive tax-related actions for people and businesses affected by the attacks in Israel.