The IRS won’t target low-income Americans in tax investigations as much as it used to.
The agency said this week it plans to reduce audits for taxpayers who claim the Earned Income Tax Credit, or EITC, a tax benefit that largely helps low-income families. Instead, it will focus its efforts on wealthy individuals and large corporations that are not paying their tax bills as well as bad actors victimizing taxpayers.
This move should faster free up tax refunds for families who need them most and go a long way toward eliminating racial disparity in tax audits.
Commissioner Daniel I. Werfel wrote in a letter to the Senate Finance Committee on Monday, “Over-reliance on audits to resolve fundamental errors could result in fewer taxpayers receiving the credits and deductions for which they are eligible and thus less tax money. “Accuracy in administration is reduced.” “We are undertaking extensive efforts to improve compliance efforts in a way that solidly furthers our commitment to fair, equitable and effective tax administration.”
Internal Revenue Service Commissioner Daniel Werfel (Photo by Kevin Dietsch/Getty Images)
Nearly half of IRS audits in 2022 focused on households earning less than $25,000 and claiming the EITC, according to Syracuse University’s Transactional Records Access Clearinghouse. And most of them received the audit by mail.
This could delay the audit process, hurting low-income families who rely on tax refunds to pay bills and other necessities. Tax refunds could be up to 30% of a low-income family’s annual income, Joanna Ann, associate director of policy for the nonprofit Prosperity Now, previously told Yahoo Finance.
If these taxpayers need to amend returns during an audit, that process could take up to 16 additional weeks.
These families also have difficulty with the audit process because, unlike wealthy taxpayers, they generally do not have lawyers involved.
“Correspondence audit letters fail to provide a single point of contact,” National Taxpayer Advocate Erin Collins wrote in her annual report to Congress. “Low-income taxpayers face communication barriers that hinder audit resolution, increasing the burden on taxpayers and leading to negative outcomes.”
The agency’s latest move may ease some of that burden.
The Internal Revenue Service Building in Washington, DC on January 24. (Photo by Stephanie Reynolds/AFP via Getty Images)
The effort follows a study this year conducted by Stanford in conjunction with the Treasury that found the Internal Revenue Service audits Black taxpayers 2.9 to 4.7 times more often than non-Black taxpayers, a “key source of disparity.” “Arises from making a claim. EITC.
The disparity in audit rates still exists among black taxpayers who do not claim EITC benefits.
“The commissioner’s letter to the Senate was a great first start,” Dorothy Brown, a lawyer and tax professor at Georgetown Law, told Yahoo Finance. “Moving forward, they need to ensure that Black taxpayers are no more likely to be audited than non-Black taxpayers, regardless of income level.”
The agency’s new focus is on “dishonest return preparers and other bad actors,” such as those who file tax returns for more vulnerable taxpayers such as low-income, taxpayers of color and filers whose first language is not English.
The agency believes that targeting these bad actors will help reduce the number of taxpayers at risk of audit.
“The initiatives outlined in this paper are the result of the incredible work of legal thinkers and tax law professors like Dorothy Brown and Steven Dean to bring this inequity to the attention of the media and policymakers,” Ann told Yahoo Finance.
“The need to focus tax audits on the wealthy and corporations and high-level tax evaders rather than low-income households and households of color is critical to advancing a fair and equitable tax code.”
Rhonda is a personal finance senior reporter for Yahoo Finance and attorney with experience in law, insurance, education, and government. Follow him on Twitter @writesronda,
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