IRS to reduce audits of Earned Income Tax Credit claims.

IRS to reduce audits of Earned Income Tax Credit claims.

IRS Pledges to Reduce Audits for Lower-Income Taxpayers

IRS Audit

IRS audits are notorious for causing anxiety among taxpayers. However, the frustration is compounded when these investigations appear to disproportionately target individuals with lower incomes. The earned income tax credit (EITC) has been at the center of this controversy, with a recent study revealing that Black taxpayers are audited at three to five times the rate of other taxpayers. This disparity has raised concerns about whether the IRS is adequately focusing on higher earners and effectively auditing complex partnerships and large corporations.

In a letter to Senate Finance Committee Chair Ron Wyden, IRS Commissioner Danny Werfel has pledged to reduce the agency’s focus on EITC and similar audits. Werfel states that “over-reliance on audits to resolve basic errors can lead to fewer taxpayers receiving credits and deductions for which they are eligible and thus decrease accuracy in tax administration.” This move is part of the IRS’s “rebalancing effort” to shift its tax enforcement and compliance efforts toward wealthier taxpayers and large corporations, driven in part by the funding provided under the Inflation Reduction Act.

Fewer Audits for Taxpayers with Lower Incomes?

The EITC is a credit claimed by many federal income tax returns, benefiting workers with lower incomes by lowering their tax liability or providing a cash-back refund. As of December 2022, approximately 31 million workers and families received around $64 billion in earned income credits. In the 2023 tax year, the maximum EITC amount is $7,430, depending on various factors.

A study conducted by the Stanford Institute for Economic Policy found that the EITC was the primary source of racial disparity in IRS audit rates. Interestingly, the study reported that Black taxpayers were not more likely to claim the EITC compared to Hispanics and Whites. Additionally, the IRS does not have information about a taxpayer’s race when selecting returns for audit. The study concluded that the significant audit disparity was likely due to the IRS’s audit algorithms targeting the refundable tax credit.

Commissioner Werfel announced that for the 2024 filing season, taxpayers can expect fewer correspondence audits (conducted through mail) for tax credits such as the Earned Income Tax Credit, American Opportunity Tax Credit, Health Insurance Premium Tax Credit, and Additional Child Tax Credit. The IRS has already implemented certain changes and plans to conduct pilots in the future to refine the EITC audit selection process. The findings from these pilots will be monitored and publicly shared.

Focusing on Wealthy Taxpayers, Millionaire Evaders, and Large Corporations

While reducing audits for lower-income taxpayers, the IRS is simultaneously intensifying its enforcement and compliance efforts aimed at wealthier taxpayers, millionaire tax evaders, large corporations, complex partnerships, and unscrupulous promoters. To tackle complex audits, the agency intends to hire 3,700 new revenue agents.

Additionally, the IRS recently imposed an immediate moratorium on processing new claims for the employee retention credit (ERC). This step is part of the agency’s ongoing efforts to combat scams and protect taxpayers and honest business owners.

In conclusion, the IRS’s pledge to reduce audits for lower-income taxpayers is a significant step towards creating a fairer and more balanced approach to tax enforcement. By shifting their focus towards wealthier taxpayers and larger corporations, the agency aims to ensure greater accuracy in tax administration. This move, coupled with ongoing efforts to tackle tax evasion by millionaires and the hiring of more revenue agents, demonstrates the IRS’s commitment to enhancing tax compliance and fairness in its operations.


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